Tax Debt 101

Your reduce my tax debt plan will not succeed unless you understand the fundamentals of tax debt collections and certain IRS principles. Read on for a summary of the things you must know about tax debts.

Statutes of Limitations

The statute of limitations is especially important for tax payers to understand, as it limits the IRS on when they can audit you and how long they have to collect tax liabilities. According to federal law, the IRS has three years from the day you filed your tax return to audit you and assess additional tax liabilities. After this point, the IRS cannot audit your return unless they suspect tax fraud. With regard to collections, the IRS has ten years to collect tax liabilities. This is the period on which your reduce my tax debt plan should focus because after the ten-year limit, the balance of your outstanding tax liabilities disappears for good. The ten-year limit applies to audit assessments and balances due on tax returns.

IRS Interest and Penalties

Those with the goal to reduce my tax debt are often most interested in the penalties and interest the IRS can apply to tax liabilities. First of all, tax penalties only apply to late payments if you have taxes owed. In other words, if you will receive a tax refund that year, there is no penalty for filing late because nothing is owed. If you do owe a tax debt, three different kinds of penalties will apply if you pay late: the failure to pay penalty, the failure to file penalty, and interest charges. Your efforts at reducing tax debt might focus on eliminating or reducing these penalties to more reasonable levels. We've explained each of these penalties in more detail below.

• Failure to pay penalty. This penalty is based on the amount of tax debt you owe. The penalty is a half of a percentage point for every month you do not pay your tax debt in full. This penalty has no limit.
• Failure to file penalty. Based on the amount of time that passes from when your tax return was due to when you actually filed. You will pay an additional 5% on your tax debt for every month you were late, up to a 25% maximum penalty. In your reduce my tax debt plan, you might be able to negotiate this penalty to a lower amount.
• Interest charges. Based on the amount of tax debt you owe. IRS interest rates change every three months. Currently, the interest rate for tax debt is 5% annually. As you try to reduce tax debt, you might try to bargain for a reduction in the interest charges assessed to your tax obligations.