A large amount of IRS debt might be a heavy burden, but you can ignore the problem, the worst thing you can do. It is not going away.
“It depends on your debt level, but it can be overwhelming,” said Beverly Winstead, a tax attorney in Laurel, Maryland.
“For some folks, $10,000 in IRS debt may appear to be $100,000 for someone in my private business, but you can’t bury your head in the sand,” she explained. “There are solutions to help you get started in the correct direction.”
Resolving the issue by submitting current tax returns and possibly establishing a longer-term strategy to pay off back taxes due is a step in the right direction.
The IRS will continue to assess fines and impose interest on outstanding tax obligations until paid in full. In 2019, the service issued 782,735 notices of levy to third parties garnishing income from delinquent taxpayers. It lodged almost 543,604 tax liens on the property.
The longer you wait to deal with a tax debt situation, the bigger the hole becomes.
“Taxpayers who owe the IRS should deal with it as quickly as possible since it might linger for years,” said Tom Gibson, a CPA at Tax Saving Professionals in Vero Beach, Florida. “Ignoring it will just make it worse.”
Gibson advises taxpayers to prioritize settling tax debt over other responsibilities, even if it means foregoing a home mortgage. “The IRS has the authority to seize your house or your business assets,” he says.
What should you do if you are unable to pay?
The first option, particularly for business owners, is to obtain a bank loan or line of credit to pay off your debts. The interest may not be deductible, but it will likely be lower than the IRS’s effective rate.
Penalties on delinquent tax balances accrue at a monthly rate of 0.5 percent. The IRS also imposes interest on the sum at the federal short-term interest rate, presently 0%, plus 3%. This adds up to a 9% requirement, increasing if interest rates rise.
Another option is to take out a loan from a qualified pension plan, such as a 401(k) or an individual retirement account, which you can repay over time. You will miss out on prospective investment gains, and there will be some interest payable in replacing the funds. Still, it will be substantially less than the carrying cost of debt with the IRS.
