The beginning of a new decade brings the promise of a new beginning and a chance for a fresh start, but if you are one of over 14 million Americans entering 2020 carrying the heavy burden of tax debt, then you may need to tie up the loose ends from the 2010s before starting your next chapter.
One of the largests challenges of owing a tax debt is staying up-to-date with the ever-changing policies and laws that affect the way in which tax debts are collected and how interest rates and fees affect balance growth.
The constant changes in our laws leave many taxpayers unsure about their options and the best way to proceed to eliminate their tax debt for good.
If your tax debt is following you into the new decade, here are the top 5 things our TaxRise tax experts say you need to know.
The Failure To File Penalty Is Rising
Over 65% of taxpayers in tax debt also have unfiled tax returns with the IRS and are plenty aware of the “Failure to File” penalty that is added to their balance on a monthly basis.
If you do not file your return before the tax deadline, a late filing penalty will be attributed to your balance. Currently, this is a penalty of 5% of your taxes owed for each month you fail to file. This fee continues to be applied until you have reached the maximum 25% of the taxes you owe.
Furthermore, if you have not filed your taxes within 60 days of the tax deadline, you will be hit with another fee of $205…but this fee is increasing for the 2020 tax year.
The new Failure of File Penalty Fee will be $330 and the increase is cited due to inflation.
Filing Your Taxes Can Actually Help You Get Out Of Tax Debt
Many taxpayers who do not file their taxes don’t do so because they’re scared that they won’t be able to afford the bill – or they’re already in tax debt and don’t want to “draw more attention” to their case.
Unfortunately, not filing your taxes can draw much more IRS attention to your debt than not filing at all. While it is not illegal to owe tax debt, avoiding your tax debt is a serious crime.
Remember: if you do owe tax debt and need to file your current or past due returns, it’s always best to invest and have a professional file your taxes rather than rely on free or cheap DIY options.
When you owe tax debt, every last penny counts. You want to be able to get the largest possible refund available to you so that you can apply that amount against your tax debt.
Professional tax preparers are experts at finding hidden money in tax returns. In fact, some taxpayers stress over their tax debt day and night, only to have their tax debt amount paid by the refund they receive after filing.
Interest Rates Are Staying The Same…For Now.
The Internal Revenue Service announced on December 6, 2019 that interest rates for tax debt will not be adjusted for the calendar quarter beginning on January 1, 2020.
The rates will continue as follows:
5% for overpayments
4% for corporation overpayments
2.5% for the portion of corporate overpayment exceeding $10,000
5% for underpayments
7% for large corporate underpayment.
IRS interest rates are determined on a quarterly basis under the Internal Revenue Code, and for taxpayers, those rates are the federal short-term rate plus 3 percentage points.
So, what does this mean for a taxpayer in tax debt?
Interest rates are applied to your federal balance on a daily compounded basis, which means that every day the interest is reapplied to your tax debt on top of past interest and fees.
Debts that are affected by daily compounded interest increase dramatically faster than any other type of interest rate, which is why tax debt is one of the most difficult debts to climb out of.
With the IRS chronically underfunded and behind schedule, a lingering tax debt can fester for years before a taxpayer receives a notice – all the while, daily compounded interest keeps your balance growing.
Victims Of Natural Disasters Can Receive A Break
With natural disasters being more and more common in America every year, more taxpayers than ever are eligible to receive some tax relief if they were affected by one of the many natural disasters that have affected the country.
While the tax “relief” that the IRS provides for natural disaster victims are not attractive as the relief options offered through the Fresh Start Initiative, it can still provide taxpayers the breathing room they need to keep the IRS at bay for a couple of months.
The tax relief options vary depending on the natural disaster, but taxpayers can expect waivers of some fees and delays of collection activities when applying for natural disaster tax relief.
Currently, the IRS is providing additional tax relief for victims of Hurricane Dorian, Hurricane Michael, Hurricane Florence, California wildfires, Hurricane Irma, Hurricane Maria, and Hurricane Harvey.
The Ten-year Statute Of Limitations Has Some Fine Print
One of the saving graces that taxpayers discover when they owe back taxes is the ten-year Statute of Limitations that the IRS has to collect their debt.
On the surface, this statute implies that once a tax debt is ten years or older, the IRS can no longer legally collect that debt and the record of debt is wiped from the taxpayer’s file.
However, the ten year statute is commonly misinterpreted. Many assume that the ten year clock starts when the tax is first accrued thinking that any tax debt from 2010 or older would no longer be able to be collected once 2020 comes.
But the statute actually refers to ten years from the date the debt was first assessed by the IRS.
Unfortunately, the IRS does not always assess tax debt in a timely manner. The IRS has up to ten years to assess a tax debt, and then once the debt is assessed, the 10 year statute begins.
This means many taxpayers are still required to pay their debts from the Aughts. It is best to consult with a tax professional if you have questions of when your debt with the IRS would expire.