What happens when you owe the IRS? Or, oftentimes more accurately stated: what happens when the IRS thinks you owe them? The IRS has a wide array of tools to crush us, mere commoners. Here are a few of them.
- The IRS Notice
The IRS will send their infamous notice. Many times, these notices give severe panic to a taxpayer only momentarily. Then the notice is buried in other mail until the taxpayer receives a follow-up notice a few weeks later. Sometimes the stated balance due is accurate, and sometimes it is not. There could be missing information or an error caused by the IRS.
- Penalty and Interest
The IRS will begin charging interest and penalty on what they believe is the balance due. The IRS determines its interest rate on a quarterly basis. For individuals, the underpayment rate is the federal short-term rate plus 3 percentage points. Applicable federal rates can be found in the link here. The IRS states that it generally does not abate interest charges and they continue to accrue until all assessed tax, penalties, and interest are fully paid. If the IRS believes you paid less or paid late, they will also assess a penalty on the balance. If the tax due balance is over $1,000, the IRS generally assesses a 0.5% penalty per month, up to a maximum of 25%, of the amount of tax they believe has remained unpaid from the due date of the return until the tax has been paid in full.
- Lien and Levy
The IRS can place a lien on and levy your assets or rights. A lien is a claim that the IRS may file with local or state authorities, which may include the county recorder of deeds, the Secretary of State, or even consumer credit reporting agencies. A levy, however, is a seizure of your assets or rights. People often hear about the IRS taking property to which they are not entitled, but it’s fairly uncommon for the IRS to attach a lien against and ultimately seize someone’s home; however, it is far more common for the IRS to attack a taxpayer’s wages, bank account, retirement account, and social security income. When the IRS plans to do so, generally, they will send you a “Final Notice of Intent to Levy and Notice of Your Right to A Hearing” (levy notice) at least 30 days before the levy.
- Subsequent Refunds
The IRS can apply your subsequent tax year refund to any outstanding bill they believe exists. If you don’t settle an outstanding dispute with the IRS in regard to taxes owed, they will simply hold subsequent tax refunds until the dispute is resolved.
- Referral to Private Collection Agency
The IRS can refer debt owed to a private collection agency. Congress passed legislation allowing the IRS to use private debt collectors to help in collecting taxes. If your case gets referred to one of the collection agencies, don’t be surprised to receive endless calls and letters.
Dishonorable Mention
If the IRS determines that there is a seriously delinquent tax debt, the IRS may notify the State Department. Upon being notified of the delinquency, the State Department generally will not issue or renew and may revoke, your passport. A “seriously delinquent tax” generally means an unpaid, legally enforceable federal tax debt of an individual totaling more than $51,000 (including penalties and interest) for which a Notice of Federal Tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted, or a levy has been issued. In short, it’s unlikely, but the IRS and the State Department possess this authority.
MoneyManeuvering 