Tax evasion and delinquency, two tax phenomena, two of the big problems that the Federal Government and state governments have, and they are really serious. Every year, thousands of Americans stop paying their taxes or fall into delinquency with the Internal Revenue Service (IRS).
The reasons behind this behavior are varied and complex, and can be influenced by personal, economic and even psychological factors. Next, we will analyze the main reasons why Americans stop paying their taxes and enter into debt with the IRS, and we will explore the mechanisms for establishing a payment agreement with the IRS to resolve such debt.
Americans in Debt With the IRS
There are several reasons, but one of the main ones is the loss of employment or the lack of sufficient income to comply with tax obligations. Many people prioritize essential expenses such as food, housing and utilities, leaving tax payments on the back burner.
On the other hand, it is no secret to any American that our country has one of the most expensive health care systems in the world. Serious illnesses or unexpected medical emergencies can result in high bills that leave little financial scope for other obligations, including taxes.
Being in Debt to the IRS Isn’t Always Your Fault
There is a significant segment of the population that does not fully understand the tax system. Filing errors, such as underestimating income or not including certain deductibles, can result in tax debts that accumulate over time.
The tax system in the United States is designed in a way that many consider difficult to understand without the help of a professional. Tax forms contain multiple sections that require an accurate understanding of what constitutes income, deductions, and tax credits. To make matters worse, tax laws can differ significantly between states, adding another layer of complexity for those who are required to file returns at both the state and federal levels.
Changes in tax laws can also happen, and changes in such laws can cause problems or confusion. Sometimes taxpayers may not be aware of these legislative changes, and that’s also when they get into trouble.
Other problems cause delays in tax payments, for example, small and medium-sized enterprises that may be particularly affected by fluctuations in the economy. Sometimes you can plan, and sometimes you can’t, and they don’t always get you right.
Some people do not manage their personal finances properly and prioritize optional expenses over fulfilling their tax obligations. This may also include spending on entertainment, luxury items, or personal loans. Divorces, deaths in the family and other traumatic personal events can divert a person’s attention and financial resources, leading them to default on their tax obligations.
How to Make a Payment Agreement With the IRS for a Tax Debt
When a taxpayer finds himself in debt to the IRS, the first thing he has to do is act as quickly as possible to avoid additional penalties, and interest accruals. In very serious cases, the IRS can even take criminal actions such as liens that can leave you in a very uncomfortable economic position.
- Installment Agreements: This agreement allows taxpayers to pay off their debt through monthly payments. Depending on the amount of the debt and the taxpayer’s financial situation, the IRS offers both short-term and long-term options.
- Simplified Agreement: For debts less than $50,000 and that can be paid within 72 months or before the expiration of the statute of restrictions, whichever comes first.
- Long-Term Agreement: For debts up to $10,000 that can be paid off in a year or more.
- Offer in Compromise: This option allows taxpayers to settle their debt for less than the total amount owed. To qualify, taxpayers must show that paying the entire debt would cause financial hardship and that they do not have the ability to pay the full amount. The IRS considers factors such as income, expenses, ability to repay, and asset value to approve this type of arrangement.
- Temporary Suspension of Collection (Currently Not Collectible): If debt payments make it impossible for a taxpayer to meet basic needs, the IRS may temporarily designate the account as “Currently Not Collectible.” This does not eliminate the debt but suspends collection efforts until the taxpayer’s financial situation improves.
- Penalty Abatement: Taxpayers may request a reduction or elimination of fines if they can prove that the noncompliance was due to extenuating circumstances, such as serious illness or natural disasters.
Voluntary Tax Assistance (Fresh Start Initiative): This program started in 2011 offers greater facilities for debt reduction and repayment plans, as well as to qualify for an Offer in Compromise.