Small debt can have real consequences if you let it build up for too long — and that’s certainly the case with the tax debt you can accumulate by not paying the IRS what you owe.
Even if your debt is less than $10,000, the agency will charge interest and penalties until you pay off the balance. Acting now and knowing the agency’s predictable increase timeline can help you resolve the issue without your tax liability growing to an unmanageable amount.
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What you should know about interest and penalties
When the due date for overdue taxes passes, the IRS will usually begin charging interest. The rate of that interest is the short-term rate including 3%, and it is determined every quarter. Interest on unpaid taxes compounds daily (in other words, it can add up quickly).
If you don’t pay what you owe, you’ll also face a monthly late payment penalty. The penalty is 0.5% of what you owe per month or part of the month up to 25%. That increases to 1% 10 days after the IRS issues a notice of intent to levy against your property for unpaid taxes. However, if you get an installment agreement with the IRS, the interest rate drops to 0.25% while the agreement is in effect.
A small debt can become a big one if you’re not careful, but when it comes to IRS debt, there’s a predictable sequence of events. After filing your taxes, you will receive a CP14 notice if you owe any money.
If you do not pay, you will receive additional notices. But the IRS can eventually seize assets to recover what you owe.
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What to do if you are in debt
The easiest way to solve the problem and avoid extra interest and penalties is to pay off all the money you owe, if you can. You can pay online directly through a bank account, debit card, credit card or digital wallet. You can also pay with an IRS account online, by money wire, cash or mail order, or cash at a retail partner like Dollar General, Family Dollar or CVS Pharmacy. The IRS has details on its website.
You can also set up a payment plan, and there are several options. You can set up a short-term payment plan where you will do it in 180 days or less or a long-term payment plan. And if you owe $10,000 or less (excluding interest and penalties), you may qualify for a “Guaranteed Installment Agreement,” which means the IRS must accept your request for a payment plan.
Alternatively, you may be eligible for a temporary payment delay if you are unable to pay due to financial hardship.
If you’re not sure what makes sense for you, consider consulting with the IRS or a tax professional.
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