What to Expect If You Have Overdue Back Taxes

Mandi Rogier

Expert Contributor
Last Updated: December 9, 2021

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Everyone hopes for a hefty refund at tax time, but you may dutifully file your paperwork to discover that this isn’t the case.

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1 How to Verify Your Tax Debt

2 Penalty Charges for Tax Debt

3 IRS Debt Collection Practices

4 Payment Options for Overdue Tax Debt

If you didn’t pay enough in taxes throughout the year, you will owe tax debt to the IRS. Ideally, you’ll pay off this debt when you file your taxes.

If you can’t or don’t take care of the sum right away, you’ll end up dealing with overdue tax debt. This can come with some frustrating consequences, including penalties, fees, and the unpleasant struggle of dealing with debt collection agencies.

If you know or suspect that you have overdue tax debt owed to the IRS, it’s important to understand what you’re dealing with. Taking the right actions now can save you from more severe consequences in the future.

How to Verify Your Tax Debt

The first thing you should do if you’re dealing with overdue tax debt is verify how much you owe. If you’ve just filed your taxes, you may have a good idea of the sum that’s due. However, your tax debt will grow the longer it goes unpaid. Contact the IRS for a current assessment of what you owe the government.

What to Expect If You Have Overdue Back Taxes

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You can do this in several ways:

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Call the IRS. Call the IRS at 1-800-829-1040 and speak with an IRS agent. Tell this person that you’d like to review your tax account for liabilities. You will have to verify your identity with personal information including your Social Security number, birth date, address, and tax form number.
Request a transcript of your debt by mail. Fill out form 4506-T and mail or fax it to the IRS to formally request a transcript of your debt. You will receive a document with the balance for the tax year requested. If you have outstanding debt for multiple years, you will need to submit a new form for each year’s transcript.
Check your debt online. The IRS offers a handy online tool that allows you to log in and check the status of your account. After verifying your identity, you’ll be able to view your payoff amount, current balance for each tax year with an outstanding balance, and payment history for the last 24 months. These numbers are updated every 24 hours.

Calling or checking online is the best way to get current information. If you request transcripts by mail, the information may be outdated by the time it reaches you, though it will give you a rough idea of what your debt looks like. If you choose to call the IRS, you can begin discussing your payment options immediately.

Penalty Charges for Tax Debt

The longer your tax debt goes unpaid, the more you will ultimately owe. It’s important to address your unpaid tax debt as soon as possible for the most favorable outcome.

If you file your taxes on time, but can’t pay the amount owed immediately, you will pay a penalty of 0.5% of the total owed each month that the debt goes unpaid. If you don’t file on time, you’ll be subject to a penalty of 5% for every month that the return is late, up to a total of 25%. Once the return is 60 days late, your penalty reaches a minimum of $100 or 100% of the tax owed, depending on which is smaller.

In both cases, you are also charged interest for the unpaid tax debt. This begins accumulating on the original due date for the payment. The interest rate for your tax debt is updated every three months. The amount is determined by adding 3% to the federal short-term interest rate. Interest compounds daily.

IRS Debt Collection Practices

The IRS used to collect outstanding tax debts itself. However, it has recently begun working with private collection agencies. If your account is passed from the IRS to a private collector, you will receive written notices from both the IRS and the agency that has taken over the account. The IRS is currently working with four agencies:

CBE
ConServe
Performant
Pioneer

Though these agencies may contact you about your debt, you should not submit payment to them. You can still set up electronic payments with the IRS to settle your debt. If you choose to make a payment by check, this should be addressed to the U.S. Treasury and mailed to the IRS, not the collection agency. If you are asked to submit a payment in any other form, it is likely a scam.

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Payment Options for Overdue Tax Debt

There are several options that you can explore if you’re struggling with overdue tax debt that you can’t afford to pay. You may qualify for an offer in compromise which allows you to settle the debt for less than you actually owe. The IRS will consider your income, expenses, assets, and ability to pay when determining whether you’re eligible for an offer in compromise.

It can take the IRS some time to review your offer in compromise. To avoid further collection actions, you should still pay what you can while you wait. When you submit your offer in compromise, you should also:

Pay 20% of your total offer amount, with plans to pay the remaining sum in five payments or less if the offer is accepted; or,
Submit your initial payment for your proposed offer in compromise and continue to make payments as proposed until you receive a decision on the offer.

If you’re facing temporary financial difficulties, you can request that the IRS delay collection temporarily, while still paying the full sum when your situation improves. You may also set up a payment plan for tax debts that you can afford to pay in smaller chunks over time.

Overdue tax debt is something you should never ignore. Don’t wait until you’re being contacted by collection agencies to settle your debt. The sooner you contact the IRS, the better. Solvable can help you find the best solution for your individual needs. We’ll assess your financial situation and help you come up with a plan that will resolve your overdue tax debt as quickly and affordably as possible.

Mandi Rogier

Expert Contributor
Last Updated: December 9, 2021

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