Sep 25, 2023
So, you or your client have accrued past-due income taxes or past-due employment withholding tax for their business. It is entirely understandable, given all we have endured over the last few years. Times have been tough! Businesses were temporarily shut down or limited once the COVID pandemic struck, causing a massive ripple effect in our once-stable economy. The price of the dollar no longer stretches as it once had, as there has been no recovery or relief since. Add a past-due tax debt to the economic depression we are all feeling, and it becomes the straw close to breaking the camel’s back. There are options to address the tax debts, as we have reviewed in prior blogs… the one we are going to address today can initially seem a bit taboo, but it’s something that should be considered.
First, let’s talk about interest rates. Two years ago, the Internal Revenue Service was charging 3.0% interest on unpaid taxes owed. While it was an annoying addition to the debt, it was the equivalent of an annoying gnat flying around your head. Effective October 1st, the Internal Revenue Service will charge an interest rate of 8.0% on unpaid tax balances. Now it’s a big ole’ horsefly landing on your head and biting you every hour!
And keep in mind that while this is the annual amount of interest charged, it is compounded daily, meaning that the amount of interest charged related to the balance on day one is added to the balance on day two that then has interest charged on that day’s balance. Don’t forget, too, that the amount of interest is being charged to the principal tax plus any penalties levied for failure to file, failure to pay, etc., as well. This creates a snowball effect!
It’s also important to remember that when a tax debt is owed to the Federal Government, there is almost always a related tax owed to the State. Most States follow the IRS’ steps when it comes to past-due taxes owed, with similar interest and penalties being assessed on past-due taxes owed. While the amounts of penalties assessed vary based on the tax type and current State policies, the following is a sampling of the various interest rates charged in 2023 by some of our States:
Considering all of this, it’s easy to see that considering all options available, including lending at higher interest rates like we are seeing right now, may be the best leverage for our client’s dollars.
Next, I want you to remember that the interest paid on a past-due tax debt cannot be claimed as a deduction on a personal or business income tax return. However, if you take out a loan to pay a past-due tax debt, you can! So, while a 7.0-8.0% interest rate on a loan is not ideal, if you can use those funds to address the current balance owed, you are essentially leveraging the client’s tax position to be more beneficial than if they address the tax debt owed with monthly payments over the next five or six years through an Installment Agreement.
The last benefit I want to review with you when it comes to addressing a past-due tax debt with a loan is that it can prevent a Federal or State Tax Lien from being filed if one has not already been recorded. If one has already been recorded, it may make the process of securing a loan more challenging and add a bit to the interest rate that will be quoted, but upon payment of the taxes owed, the tax liens will be released. If the taxpayer then pays the loan as required, they can explore options to re-finance in the future to secure a better rate.
If you or your client has a tax debt and want to consider lending as an alternative to address the debt, feel free to reach out to us to be connected to reliable, vetted lenders. If you are considering lending as an option but aren’t sure it would be in your best interest, contact the team at Golden Lion Tax Solutions. With over two decades of experience addressing thousands of different taxpayer situations, we have the first-hand knowledge required to make a sound assessment of your situation to evaluate lending and all other options available. We understand it isn’t easy to make this type of decision; we are able and willing to share our expertise to make sure you make a sound and educated decision!
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Trust. Protection. Wisdom.
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 contactus@goldenliontaxsolutions.com 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.
