May 15, 2023
So you file a personal income tax return and there’s a tax balance due that you can’t pay. Now what? The IRS or State records the tax debt on your account, and seemingly, overnight, the total balance owed begins to increase. How in the world and why??? To fully understand what happens with a tax debt, we have to start with the Federal and State Government’s viewpoint on tax debt accrual as a philosophy.
Whenever a tax debt is recorded on a taxpayer’s account, the IRS and State want to do whatever is possible to discourage it from happening again. Therefore, the notion of penalties and interest was created. “If we charge you more when you accrue a debt, you’ll never want to do it again.” And there begins the downward spiral.
Let’s talk about penalties first. What comes to mind when you hear the word “penalty”? Is it a box on the side of an ice rink where some big, padded-up, hockey player sits growling at a referee that deemed his check as overly aggressive? Is it an extra stroke a golfer is forced to take when his ball is lost to an alligator in a pond in the middle of the 16th fairway? Any way you slice it, a penalty is something that happens when an out-of-bounds play happens. The same holds true with a tax payment misstep.
What types of penalties are there? Truth be told, enough to make your head spin. Because every State handles tax penalties differently, let’s look at the most common IRS penalties:
Because the IRS wants to really make a point, a tax period can have all applicable penalties assessed on the debt at one time: if a taxpayer didn’t file their income tax return on time and when they did, a tax balance due was reported, they will be charged for failure to file and failure to pay penalties. However, as with most things with the IRS, there is an asterisk that comes into play here: if both a failure to file and 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. Clear as mud, yes?
Now penalties are just one-half of the “make them pay more so they don’t do this again” thought process… the other half is charging interest on any balance due carried on a taxpayer’s account. While the states vary with how interest (and sometimes fees) are assessed, the IRS typically sets the tone. Per the IRS’ Internal Revenue Manual, their rulebook for all things administrative and operational within the IRS, in §18.104.22.168.1 it states (in so many words) that interest assessment is mandatory on underpayments unless otherwise specified by law.
And while assessing interest is mandatory, the amount of interest charged changes per quarter in accordance with the Federal short-term rate’s fluctuations. For large corporate underpayments (underpayments of tax exceeding $100,000 by a C-Corporation), the interest rate charged is the Federal short-term rate plus five percentage points. For the rest of the taxpayers in the U.S., individuals, sole proprietors, LLCs, etc., the interest rate charged is the Federal short-term rate plus three percentage points. With the fluctuation of our nation’s economy, the IRS follows suit… and so do many of the States. In the 2nd Quarter of 2022, the interest rate charged by the IRS on an individual’s past due income tax balance was 4%; in the 2nd quarter of 2023, that same debt is being charged 7% interest.
When addressing a taxpayer’s past-due tax debt, the ongoing penalties and interest charged by the IRS and State need to be factored into every good-faith payment made and any resolution agreement considered. The Golden Lion Tax Solutions team incorporates this consideration into their daily practice for their clients and has the knowledge and experience to make sure any payments made to a client’s tax debt are leveraged in the best manner possible with the goal of minimizing penalties and interest. If you or your client has a past due tax debt and it feels like the penalties and interest are mounting faster than fathomable, give us a call!
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Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.
For help with your tax debts, email firstname.lastname@example.org or call 833-LION-TAX (833-546-6829)
Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.