You had a hard enough time figuring out how to handle your tax debt when you saw your first bill. Now, you're getting more bills and your debt seems to be growing out of control. What's causing the rapid increase in your back taxes? The answer is the accumulation of Penalties and Interest. This page will show you what Penalties and Interest are doing to your tax debt and what you can do about it.
Breaking Down Penalties and InterestTo understand how Penalties and Interest affect your tax debt, you need to break down the two different factors influencing how high your tax debt is growing.
PenaltiesThere are two main types of Penalties. The first is the Failure to File Penalty. It adds another 5% of what you owe to your tax debt every month you do not file past the due date. This penalty caps off at 25%. The second is the Failure to Pay Penalty. Every month that you do not pay off your tax debt in full, another 0.5% is added to your tax debt. Unlike the Failure to File Penalty, there is no maximum limit to what this penalty can add to your debt.
InterestThe Interest is what can really hike your tax debt up. It fluctuates wildly per quarter; ranging anywhere from 3% to 9%. The average percentage in recent years has been around 5%. The Interest on your debt is calculated every day it goes unpaid.
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What You Can Do About Penalties and InterestIf Penalties and Interest are making your tax debt difficult to pay off, you may want to consider a Penalty Abatement. Is there a reason why you couldn't file on time, or were there tragic circumstances beyond your control that caused your tax debt? A Penalty Abatement may actually work to lower your tax debt! In order to file for Penalty Abatement, you need to fill out and mail a Form 843. The review is a subjective process done by an IRS employee looking for certain things. It may be best hire a tax professional to file the Penalty Abatement for you.
The best way to diminish the damage Penalties and Interest can do to your debt is to try to pay it off. Filing for an Offer in Compromise, or applying for other tax programs, calls for a review process. Time waiting on tax debt miracles is time the Penalties and Interest are accumulating.
If you cannot pay the debt in full, get into a payment plan. You will still have to deal with Penalties and Interest. However, you can apply your payments directly toward the tax portion of your debt. This will greatly lessen the Penalties and Interest, since they are closely related to how much you owe in actual taxes. You will still need to pay the Penalties and Interest, but it will not be as steep.
If you are concerned about what Penalties and Interest are doing to your tax debt, consult a professional. Call now or fill out the form below for a free tax debt consultation on how to lower your Penalties and Interest! We'll only connect you with a tax debt relief company holding at least a B rating with the Better Business Bureau.