tax debt

It can be stressful to owe taxes, particularly if you are unable to make the payments on time. If you fail to pay your taxes, serious implications can occur, including loss of wages and possessional licenses, in addition to liens and levies.

Do you owe over $20k in taxes? Wondering what to do? In this article, we’ll go through the consequences of late filing and payment, along with what to do if you owe the IRS.

Consequences if You Owe More Than 20k in IRS Taxes 

Any tax debt that exceeds $20,000 will result in penalties and interest being applied to your account by the IRS. If you fail to pay and cooperate with the IRS, here are some outcomes that can occur.

Tax Liens 

When you ignore or fail to pay a tax debt, the government can place a legal claim against your property. This is called a federal tax lien. The IRS usually only issues tax liens if you owe over $10,000, and it almost always happens when you owe $20,000 or more. 

A tax lien can affect you in the following ways:

  • Assets: During the duration of the lien, a lien is attached to all of your assets, including real estate, securities, cars, and any future assets you may acquire.
  • Credit: If the IRS files a Notice of Federal Tax Lien, it can prevent you from obtaining credit. Although the lien doesn’t appear on your credit report, it is a public record, and lenders can find it, making them less likely to extend you credit.
  • Business – All business property, including accounts receivable, as well as all rights to business property are affected by the lien.
  • Bankruptcy: Even if you file bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after bankruptcy. Only certain tax debts can be discharged in bankruptcy, so you should always consult with an attorney before taking this option.

You won’t always receive a notice before the IRS issues a tax lien. To avoid a lien, set up payments or make other arrangements on your tax debt as soon as you can. Note that if you owe over $50,000, the IRS may issue a tax lien even if you set up payments.

Levies

When you have an IRS levy, your property can be legally seized to pay off debts related to taxes. It has the power to seize and sell your car(s), real estate, and other personal belongings, garnish earnings, and withdraw money from your bank or other financial account.

The IRS usually sends out a levy after doing the following:

  • You received a Notice and Demand for Payment (a tax bill) from the IRS after they assessed the tax.
  • You failed to pay the tax or refused to do so.
  • At least thirty days before the levy, the IRS mailed you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice). The IRS may deliver this notice to you in person, deliver it to your last known address, or leave it at your residence or place of business.
  • You received advance notification of Third-Party Contact from the IRS informing you that they might get in touch with outside parties to find out or collect unpaid taxes.

The IRS may levy any property or right to property you own or have an interest in if you fail to pay your taxes (or make agreements to resolve your obligation), and the IRS decides that a levy is the next appropriate course of action. This includes real estate, personal property, business assets, bank account balances, retirement accounts, and funds owed to you by other parties. 

Penalties and Interest

Most IRS penalties are determined by your outstanding balance. That means the penalties can get very hefty if you owe more than $20k. The penalty increases if you owe more.

Types of penalties you could face include:

  • Failure to Pay: The monthly penalty for not paying taxes is 0.5% of the amount owed, and it increases to 1% if you get a Notice of Intent to Levy. The maximum penalty that can be applied is 25% of the total amount owed. For instance, if you owe $20k, the penalty will be $100 or $200 every month, and can get up to $5,000 in total.
  • Failure to File: For each month or portion of a month that a tax return is late, there is a 5% failure to file penalty. No more than 25% of your overdue taxes will be fined. 

If both a Failure to File and a Failure to Pay penalty are applied in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty for that month. This results in a combined penalty of 5% for each month or portion of a month that your return is late. 

However, over time, each penalty can get up to 25% of your balance, making the total penalty 50% of your balance. In other words, if you start with a $20,000 tax bill, you can incur up to $10,000 in late payment and filing penalties. 

Plus, interest will be imposed on the tax liability, and this interest will compound. That means interest will be added on top of interest. The underpayment interest will continue to accrue even if you file an extension. The Federal short-term rate plus 3% is the interest rate charged by the IRS.

Interest rates can vary on a quarterly basis for both overpayments and underpayments. Currently, there is a 8% interest rate for the fourth quarter of 2023 (October through December). 

Passport Revocation 

Your passport could possibly be taken by the IRS. The IRS is required to notify the State Department about taxpayers who have been identified as owing a seriously delinquent tax debt. As of 2023, a seriously delinquent tax debt is an unpaid, legally binding federal tax bill of more than $59,000 (including penalties and interest) owed by an individual for whom a Notice of Federal Tax Lien has been filed or a levy has been issued. This number is indexed to inflation and increases annually.

If you owe more than $59,000 in tax debt (including penalties and interest) and do not pay it or fail to make alternate payment arrangements, the IRS may notify the State Department that your tax bill is seriously delinquent. As a result, if the State Department gets informed of your significantly overdue tax bill, it would normally refuse to issue or renew your passport and may revoke it.

Resolution Options for Over $20,000 in Tax Debt 

If you owe the IRS, understanding your options will help you decide what to do. Here are some options for people who owe over $20,000 in taxes and can’t pay. 

Set Up an Installment Agreement

You might be able to spread out your payments over a period of 72 months (six years) by joining a short-term or long-term installment plan. If you cannot afford to pay off the balance in six years or less, you may be able to get longer, but if so, you will need to provide financial details. 

Using the IRS Online Payment Agreement application, you can ask for an installment plan if your total tax, penalty, and interest debt is $50,000 or less and you have submitted your required returns. 

If you owe over $50k, you must use Form 9465 (Installment Agreement Request) to apply for a payment plan. Depending on the situation, you may have to provide the IRS with detailed financial information to get approved.

Your individual tax situation will determine which payment options are available to you. Payment options include full payment, a short-term payment plan (paying in 180 days or less), or a long-term payment plan (installment agreement) paying monthly.

Request a Collection Due Process Hearing

You have the right to ask for a Collection Due Process hearing if you receive a Notice of Federal Tax Lien or a Notice of Intent to Levy. However, you need to have a valid protest. The IRS does not accept CPD requests for any reason, including refusal to pay taxes due to morals or beliefs.

You are only eligible to request a CPD hearing if you have valid reasons, such as:

  • You are having financial troubles and are unable to repay the debt.
  • You are unable to repay because of your serious illness and associated healthcare costs.
  • You are dependent on Social Security or unemployment benefits.
  • You want to formally request a different method of payment, like a payment plan.
  • In order to sell the underlying asset and pay the IRS, you wish to get the lien removed.
  • You have paid in full or are on a payment plan, so you need the lien erased from your credit record.

Request Penalty Relief 

As explained above, penalties can increase your balance substantially, especially if you owe $20,000 or more to start with. You may be eligible for administrative waiver relief if this is your first tax penalty or if you meet other requirements allowed by tax law. An administrative waiver exempts an individual from a particular penalty under specific guidelines.

For individuals and companies, the First Time Abatement program is the most common administrative waiver. You can ask for First Time Abate to waive the penalty even if you haven’t paid the entire amount owed on your return. However, up until the tax is completely paid, the Failure to Pay Penalty will keep accumulating.

Get Currently Not Collectable Status

The IRS could be willing to mark your account as currently not collectible if you are unable to make the payment at this time. All collection efforts against you are temporarily halted by a CNC status. After that, the IRS assesses your financial status approximately every two years. If things get better, collections can start up again. In order to be approved, you will need to provide financial information about your income, assets, spending, and debts if you owe more than $20,000.

Dispute Your Tax Liability 

If you disagree with the IRS tax liability, you may be able to request an Informal Conference and Appeals Review. You have the choice to ask that your case be forwarded to the Appeals Office if you and your supervisor are unable to come to an agreement. The supervisor must notify you that your problem cannot be handled at that level, and you have 30 days to file an appeal. The timelines and rules vary based on the situation.

File for Bankruptcy 

Your tax debt may be relieved by filing for bankruptcy, but not before speaking with a bankruptcy professional. Taxes are generally only exempt in bankruptcy if they were income taxes assessed at least three years prior, however, this is subject to change. The courts impose a stay upon filing for bankruptcy, which stops all creditors—including the IRS—from pursuing collection efforts against you for a certain amount of time.

What If I Can’t Afford to Pay? 

If you are unable to pay your taxes due within 72 months, you must submit a Collection Information Statement (Form 433-A or 433-F). These forms let you request more time to make payments, an offer in compromise, or other hardship arrangements. 

Your best options are an Offer in Compromise (OIC) or a Partial Payment Installment arrangement (PPIA) if you are unable to make the full payments allowed under a short or long-term installment agreement.

When you use an OIC, you give the IRS an offer determined by your resources, income, expenses, and general ability to pay. You can spread the payment over a maximum of 24 months if the agency approves. PPIAs allow you to make lower monthly payments than traditional payment plans, and at the end of the term, the IRS forgives the remaining balance. However, the IRS may later require higher payments if your financial circumstances change. 

FAQs

What if This Is My Spouse’s Tax Bill? 

You personally incur the tax responsibility when you file a joint return. But if you meet certain conditions, you might be able to avoid paying your spouse’s share of the bill and just have to pay your own under the innocent spouse relief program. To qualify, you generally have to prove that you didn’t know about your spouse’s unreported income or over-claimed deductions or that you were coerced into signing the return.

Can I Serve Jail Time for Owing $20,000 in Taxes? 

Not usually. Jail sentence is only an option if you have engaged in significant tax fraud. For example, you might go to jail if you submitted multiple false returns under other people’s names. You won’t go to jail if all you owe is $20,000 or more from a tax return that was filed correctly. However, you do have to be concerned about wage garnishments and bank levies.

How Do I Avoid a Large Tax Bill? 

Accurately calculating and adjusting the amount of tax withheld from your pay is one way to avoid debt. If you ended up with a big tax bill this year, update your withholdings by giving your employer a new W4. Then, evaluate your withholding at the beginning of every year or if your situation changes. If you’re self-employed or a small business owner, increase your quarterly estimated payments or talk with a tax pro about tax planning strategies.

Get Help With Your Tax Debt

When you owe over $20,000 in taxes, the IRS will take your outstanding debt very seriously. In order to collect back taxes, the IRS may employ a number of aggressive collection strategies. If you do nothing, you could be subject to asset seizures, liens, levies, and other consequences. 

Fortunately, there are a number of options available to lower your tax liability or spread out payments over time, such as a penalty relief and installment arrangements.

Need help? If you are concerned about your high tax bill, or have questions regarding your IRS notice, call us today at 425-428-5262 or schedule a consultation by filling out the form below.