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The Consequences of Owing Taxes

the consequences of owing back taxes

Owing the IRS can be a scary and confusing time, especially if you don’t know what to expect. The IRS has protocols to collect past due balances. This article will review the consequences of owing taxes.

Interest and Penalties

The IRS adds interest to your tax liability daily until you pay it in full. The maximum penalty is 25% of your unpaid tax. The current interest rates are:

  • 8% for overpayments for individuals
  • 7% for overpayments for corporations
  • 5.5% for the portion of a corporate overpayment exceeding $10,000
  • 8% for underpayments for individuals
  • 10% for overpayments for corporations

Penalties include:

  • Failure to file – If you don’t file your return or an extension, and owe, the IRS will penalize you. The penalty is currently 5% of the unpaid taxes for each month or partial month that a tax return is late, up to 25% of your total unpaid tax bill.
  • Failure to pay – If you don’t pay your taxes, the IRS will penalize you at 0.5% for each month or partial month your tax balance goes unpaid, up to 25% of your total tax bill. 
  • Accuracy-related – You may be given the IRS negligence penalty for errors. This can up to 20% of the portion of the underpayment of tax resulting from negligence..

IRS Wage Garnishment

The IRS has the ability to garnish your wages when you have an unpaid balance. This means that the IRS can seize your income and apply it to your tax liability. They can also garnish your paychecks, commissions, and bonuses. By paying the balance in full, or setting up a payment plan, you can stop garnishments.

IRS Levy

You would receive a notice prior to the IRS levying the balance. This consequence is for delinquent taxpayers and involves the IRS legally seizing your bank accounts, wages, or property to settle the tax debt. To stop a levy, contact the IRS directly. If you can prove that you’re in hardship, they may release the levy. You can also pay the balance in full to release a levy sooner.

IRS Lien

Liens are placed on physical assets, such as homes or vehicles, to satisfy tax debt. This means that the IRS takes possession of your assets, or collects a portion of what you make for selling them. You can avoid a lien by paying your balance in full, on time, or by contacting the IRS for a payment plan.

IRS Passport Denial

Major tax debt can result in the denial of acquiring a passport. State Departments can also revoke an existing passport if you’re delinquent. The IRS is allowed to deny citizens the right to travel internationally. If you receive a notice while overseas, you may receive a temporary passport to return to the US.

You can reverse passport denial by changing your status (no longer seriously delinquent), if the debt becomes legally unenforceable, or by satisfying the tax debt.

Unaffordable Tax Debt

Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.  

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Tax Reduction Strategies

Tax Reduction Strategies

While taxes are inevitable, you want to make sure that you’re not paying more than you have to. You can legally reduce your taxes by using strategies that you may not be aware of. Here are some tax reduction strategies from Optima Tax Relief.

Retirement Contribution

A simple way to reduce your taxes is by making retirement account contributions. You can make these contributions to any traditional IRA until the filing deadline in April. The amount you owe in federal taxes will be reduced as a result of 401(k) and IRA accounts being deducted from your taxable income.

If you have a Roth IRA, it’s funded with after-tax dollars. This doesn’t equate to a tax deduction, but the money in the account is tax-free even in retirement.

Deferring Income

By deferring your income, such as year-end bonuses, you can reduce your tax burden for the year. The amount of taxes reduced depends on the amount contributed over the year.

While you are able to defer wage and salary, it’s often more difficult for taxpayers to do so. It’s in your best interest to defer income if you will remain in the same tax bracket or lower the following year. This is to prevent a larger tax bill in the future. If you believe you will be in a higher tax bracket next year, you can accelerate income so that you can pay it on a lower bracket now, than a higher bracket later.

Deductions for Military Members

Being a member of the military reserves and traveling more than 100 miles from home qualifies you for a deduction for unreimbursed travel expenses. Eligible military expenses include transportation, meals, and lodging.

As an active-duty service member, moving costs for permanent station changes can be deducted.

Flex Plans

Flexible spending accounts are fringe benefits offered by employers to steer part of your pay into a special account. This account can be used to pay bills for childcare and medical expenses.

The money in flex accounts is free of income and Social Security taxes. However, there is a use-it-or-lose-it rule that can forfeit the excess money that isn’t used by the end of the year.

Is there a way to reduce tax debt?

Now that you know some tax reduction strategies, you may be able to put these into practice. Tax relief is available, and can come in different forms for eligible cases. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

What are Non-Taxable Earnings?

non-taxable

There are instances where income will not be taxed, whether or not you report it during tax season. Understanding which earnings are taxable versus non-taxable could save you a lot of time and trouble when you file your tax returns.

Non-taxable earnings

The following forms of income are non-taxable:

  • Most healthcare benefits
  • Scholarships and student loans
  • Welfare payments
  • Reimbursements
  • Child Support payments
  • Inheritance
  • Gifted money (unless of significantly high value)
  • Alimony
  • Cash rebates

In order for income to be considered non-taxable, it must be legally exempt.

Taxable vs Non-taxable Income

Some examples of taxable income would be employee wages, or constructively received income. Constructively received income is income that is available to you before the end of the tax year. This could be in the form of cash or deposit.

If an agent receives income on your behalf, this is called assignment of income. Assignment of income is still taxable, even if a third party is accepting your earnings.

Prepaid income is another taxable compensation that may include payment for future services.

Are royalties non-taxable income?

Copyrights, patents, and other properties such as oil and gas are examples of royalties. These items are taxable as income.

Are business and investment earnings non-taxable?

Business earnings such as rental properties and other investments are very much taxable. Business owners are required to pay taxes quarterly to cover Social Security and Medicare tax.

While non-profit agencies are tax exempt, you still have obligations to file a return.

What to do if you have a tax liability?

Taxable and non-taxable income can be a confusing topic. It’s best to ask a professional for assistance if you’re unsure about how or when to report income. Should you find yourself in the midst of a tax liability that is unaffordable, give Optima a call at (800) 536-0734 for a free consultation.

Student Loans and Taxes: What Current Students & Graduates Need to Know

student loans

Not all students are required to file taxes. However, there are instances where it may benefit you to report student loans.

Are students required to file taxes?

Your student loans do not count as income. Scholarships, fellowship money, and other resources given to you for school are not taxable. The taxable portion of the funds would be expenses such as travel, room and board, or optional expenses.

Tax Breaks for student loans

There are two types of credit that you may qualify for when you file: American Opportunity credit, or Lifetime Learning credit. Paying for education expenses is one of the qualifying factors in being eligible for education tax credit.

Qualifying costs include paying for books and tuition with a student loan. You can track your qualified expense payments through Form 1098-T, which is provided by your school. This form is simply a tuition statement.

Does filing jointly affect your student loans?

The short answer is, yes. Filing jointly can potentially increase or decrease your student loan payments. This is because repayment plans are income-driven, so they heavily rely on your filing status. The adjusted gross income in your tax return is used to calculate your payments.

Is there tax debt relief for students?

For complicated tax situations, it’s always best to work with a professional when you file. Selecting the wrong deductions or reporting your non-taxable income incorrectly can put you at risk for penalties. Over time, IRS penalties accrue interest, and a tax liability is the last thing you need to worry about on top of repaying education debt.

Optima assists clients with unmanageable tax debt find relief and remain compliant with the IRS. If you received a notice, give us a call for a free consultation at (800) 536-0734