What Is Tax Delinquency and How Can You Resolve It?

Tax delinquency refers to the failure to pay taxes owed by their due date. This applies broadly across federal, state, and local tax obligations. Delinquency signifies that a tax liability exists, has been formally assessed, and remains unpaid after the statutory deadline. This situation can arise for various reasons, impacting individuals and businesses alike.

Understanding Tax Delinquency

Tax delinquency occurs when legally due taxes remain unpaid past their designated deadline. This differs from tax evasion, which involves intentional illegal acts to avoid paying taxes. Delinquency focuses specifically on the failure to remit payment, regardless of intent. A tax can become delinquent even if a return is not filed, leading to an assessment of tax due, or if a filed return shows a tax liability that is not paid.

Common scenarios leading to tax delinquency include failing to file a required tax return, underreporting income, or incorrectly claiming deductions or credits. Missing a payment deadline or not responding to notices from tax authorities also contributes to delinquency. While delinquency can apply to various tax types, such as income, payroll, property, and sales taxes, the general principles of collection and resolution often mirror those for federal income tax.

Actions Taken for Unpaid Taxes

When taxes become delinquent, tax authorities, such as the Internal Revenue Service (IRS), take specific actions to collect unpaid amounts. The process often begins with a series of notices and demands for payment. The first notice, typically a CP14, informs the taxpayer of an unpaid balance and requests payment within 21 days. If the balance remains unpaid, subsequent reminders like CP501 and CP503 may follow, indicating escalating collection efforts.

Penalties and interest are automatically assessed on delinquent taxes. The failure-to-pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, capped at 25%. A failure-to-file penalty is 5% of the unpaid tax for each month or part of a month a return is late, also capped at 25%. If both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty amount. Interest also accrues daily on the unpaid balance and penalties, increasing the total debt.

A federal tax lien is a legal claim against a taxpayer’s property when a tax debt is not paid. This lien secures the government’s interest in all of a taxpayer’s assets, including real estate, personal property, and financial assets, and extends to future assets acquired while the lien is in effect. The IRS files a public document, the Notice of Federal Tax Lien, which can impact a taxpayer’s ability to obtain credit or sell property as it becomes public record.

If the tax debt remains unresolved, the IRS may proceed with a tax levy, which is the actual seizure of property to satisfy the debt. Types of levies include wage garnishments, where a portion of a taxpayer’s paycheck is taken directly by the IRS, and bank levies, which seize funds from bank accounts. Property levies allow the IRS to seize and sell assets like real estate or vehicles.

In severe cases of tax delinquency, particularly for large federal tax debts, the IRS may notify the State Department to restrict the taxpayer’s U.S. passport. This can involve denying a new passport application or revoking an existing passport. This measure typically applies when a taxpayer has a seriously delinquent tax debt exceeding a certain threshold, which is adjusted for inflation.

Paths to Resolve Unpaid Taxes

Taxpayers have several avenues to resolve their tax delinquency and avoid further enforcement actions. The most straightforward resolution is payment in full, where the entire outstanding tax liability, including penalties and interest, is paid. This immediately eliminates the debt and stops the accrual of additional charges.

For taxpayers unable to pay their full tax liability immediately, an installment agreement offers a structured payment plan. This allows taxpayers to make monthly payments over a period, typically up to 72 months, to pay off their debt. To qualify, individuals generally must owe less than $50,000 in combined tax, penalties, and interest, and businesses less than $25,000. Setting up an installment agreement can prevent further collection actions, including the filing of a federal tax lien.

An Offer in Compromise (OIC) is another option, allowing certain taxpayers to settle their tax liability for a lower amount than what they originally owe. The IRS considers an OIC when there is doubt about the taxpayer’s ability to collect the full amount, doubt about the tax liability itself, or when collecting the full amount would create economic hardship. Eligibility for an OIC depends on a taxpayer’s income, expenses, and asset value, ensuring the offered amount represents the most the IRS can expect to collect.

Penalty abatement provides the possibility of reducing or removing penalties assessed for delinquency. Taxpayers can request abatement if they demonstrate reasonable cause for their failure to file or pay on time. Reasonable cause can include circumstances beyond the taxpayer’s control, such as serious illness, natural disasters, or the inability to obtain necessary records. While interest generally cannot be abated, penalties may be removed if the taxpayer acted with ordinary care and prudence.

Innocent Spouse Relief is available for certain taxpayers who filed a joint return but believe they should not be held responsible for taxes, penalties, or interest due to their spouse’s or former spouse’s actions. To qualify, the requesting spouse must demonstrate they had no knowledge, or reason to know, of the understatement of tax when the joint return was signed, and that it would be unfair to hold them liable. This relief protects the other from an unfair tax burden.