What Does It Mean to Have Delinquent Taxes?

Taxes are financial contributions levied by government entities to fund public services and expenditures. Across the United States, individuals and businesses are obligated to pay various taxes, including federal and state income taxes, property taxes, and sales taxes. This article clarifies the concept of “delinquent taxes” and explores its implications.

Understanding Delinquent Taxes

Taxes become delinquent when they remain unpaid after the specified due date, including any granted extensions. While “unpaid” or “overdue” taxes might refer to amounts recently missed, “delinquent” typically implies a longer period of non-payment or the initiation of formal collection procedures by the tax authority.

The transition to delinquent status often follows a series of communications from the tax authority. The Internal Revenue Service (IRS) commonly sends initial notifications of a balance due, including details on the original tax amount, penalties, and interest. Ignoring such notices can lead to further communications, eventually escalating to a formal declaration of delinquency and more stringent collection actions. Various types of taxes can become delinquent, such as federal income tax, state income tax, property tax, sales tax, and payroll taxes for businesses.

Financial and Legal Implications of Delinquency

Once taxes are deemed delinquent, taxpayers face financial and legal consequences. These include penalties, accruing interest, and potential enforcement actions by the tax authority.

The IRS imposes a failure-to-pay penalty, which is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25% of the unpaid taxes. If a tax return is filed late, a failure-to-file penalty may also apply, typically 5% of the unpaid tax for each month or part of a month the return is late, also capped at 25%. Additionally, accuracy-related penalties, generally 20% of the underpayment, can be assessed if there is negligence, disregard of rules, or a substantial understatement of income tax.

Interest also accrues on the unpaid tax balance and penalties from the original due date until the debt is paid in full. The IRS sets interest rates quarterly, based on the federal short-term rate plus 3 percentage points, with the rate for individuals being 8% for the quarter beginning April 1, 2024. This interest compounds daily, increasing the overall debt.

Tax authorities may resort to enforcement actions to collect delinquent taxes. A tax lien is a legal claim against a taxpayer’s property, including real estate, personal property, and financial assets, to secure the tax debt. This lien is a public record and can negatively affect a taxpayer’s ability to sell property, obtain loans, or maintain a good credit score. A tax levy, distinct from a lien, involves the actual seizure of a taxpayer’s property or assets to satisfy the debt. Examples include bank levies, where funds are taken from bank accounts, and wage garnishments, where a portion of an individual’s salary is withheld. In more severe cases of federal tax delinquency, the IRS can notify the State Department, potentially leading to the denial or revocation of a passport.

Paths to Address Delinquent Taxes

Taxpayers have several avenues to resolve delinquent tax obligations, ranging from full payment to negotiated agreements with the tax authority. The most direct method to resolve delinquent taxes is to pay the full amount owed, including all accrued penalties and interest. This approach immediately discharges the debt and prevents further charges or collection actions.

If immediate full payment is not feasible, taxpayers can enter into an installment agreement with the tax authority. This arrangement allows for monthly payments over a set period, typically up to 72 months, to pay down the tax debt. Taxpayers can apply for an installment agreement and may be subject to a user fee.

Another option is an Offer in Compromise (OIC), an agreement between the taxpayer and the tax authority to settle a tax liability for a lesser amount than what is owed. An OIC is considered when there is doubt as to collectibility, doubt as to liability, or when collection would cause economic hardship. The tax authority evaluates the taxpayer’s ability to pay, income, expenses, and asset equity to determine if an OIC is appropriate.

In situations of severe financial hardship, a taxpayer’s account might be classified as Currently Not Collectible (CNC). This status temporarily suspends active collection efforts by the tax authority, meaning levies and liens are generally not pursued. While in CNC status, interest and penalties may continue to accrue, and the debt is not forgiven; it simply indicates that the tax authority has determined the taxpayer cannot pay without experiencing significant hardship. Eligibility for CNC status requires a detailed financial disclosure to demonstrate that monthly expenses exceed income or that available assets are minimal.

Taxpayers may also request penalty abatement in certain circumstances. This involves asking the tax authority to remove or reduce penalties. Abatement might be granted for reasonable cause, such as a serious illness, natural disaster, or incorrect advice from a tax professional. Requests for penalty abatement can be made in writing and require clear documentation of the circumstances.