How to Settle Delinquent Taxes Before It’s Too Late!

Delinquent taxes are a significant issue in the United States, with the Internal Revenue Service (IRS) estimating a gross tax gap of $696 billion for the tax year 2022. This tax gap represents the difference between the total taxes owed and the amount actually paid on time. The IRS projects that approximately $90 billion of this amount will eventually be collected, leaving a net tax gap of $606 billion.

Falling behind on taxes leads to accumulating penalties and interest. It can trigger severe enforcement actions, such as federal tax liens, wage garnishments, and even passport revocation under the IRS’s CP508C notice. Once tax debt exceeds $62,000, the IRS classifies it as seriously delinquent, placing taxpayers at risk for aggressive collection measures.

The good news is that there are clear paths to resolution. Whether through installment agreements, Offers in Compromise, or hardship relief, taxpayers can settle their debt and avoid further complications. This article explains what delinquent taxes are, the risks they pose, and how you can settle with the IRS before it’s too late.

What Are Delinquent Taxes?

Delinquent taxes refer to unpaid federal or state tax liabilities that remain outstanding after the filing deadline. The account enters tax delinquency status once the IRS assesses a tax balance and the payment due date passes without full payment.This applies to income taxes, payroll taxes, and even self-employment taxes. The IRS sends multiple notices, including a CP14 Notice, to inform taxpayers of their outstanding balance. The IRS may escalate collection efforts if the debt remains unpaid, including issuing a Notice of Federal Tax Lien (NFTL) or a Levy on wages, bank accounts, or property.

Types of Delinquent Taxes

Delinquent taxes can take several forms, depending on the type of unpaid tax liability. The most common is Federal Income Tax Delinquency, which occurs when individuals fail to pay taxes on their  income by the filing deadline. If left unresolved, this often results in penalties, interest accumulation, and escalating IRS enforcement actions.

Business Tax Delinquency is a significant concern for business owners, particularly regarding unpaid payroll taxes, as reported on Form 941, and corporate income taxes.

 The IRS views payroll tax delinquency as particularly serious, as these taxes include funds withheld from employees’ wages.

Another prevalent issue is Sales Tax Delinquency, which affects businesses responsible for collecting and remitting sales taxes to state authorities. Failure to do so can lead to state-level enforcement actions, including liens and business license revocation.

Finally, Delinquent Tax Returns can trigger aggressive IRS action. When taxpayers fail to file a required return, the IRS may file a Substitute for Return (SFR) on their behalf. This substitute return often results in a higher tax assessment because it excludes deductions and credits the taxpayer might have been eligible to claim.

Key Delinquent Notices

• CP14 Notice: The first official notice from the IRS informing taxpayers of unpaid tax.

• CP501, CP503, CP504 Notices: A series of escalating reminders urging payment, with CP504 warning of imminent levy action.

• CP508C Notice: Notification that your tax debt is classified as seriously delinquent, triggering potential passport revocation.

• LT11 or Letter 1058: Final warning before the IRS proceeds with levies on wages, bank accounts, or property.

Failing to address delinquent taxes can quickly escalate into more serious consequences. If you’ve received a CP14, CP508C, or any other IRS notice, it’s important to act quickly to protect your assets and rights. Call us today at (888) 342-9436 for a free tax consultation. 

How to Settle Delinquent Taxes with the IRS

The IRS offers several options for taxpayers to settle their unpaid taxes. Understanding these options is important for finding a solution that aligns with your financial situation. J. David Tax Law works closely with clients to navigate these solutions, ensuring the best possible outcome while protecting your rights.

1. Pay in Full

The most straightforward way to resolve delinquent taxes is to pay the full balance owed, including any penalties and interest. The IRS accepts payments through the IRS Direct Pay portal, by check, or via the Electronic Federal Tax Payment System (EFTPS). Once the payment is made, the IRS stops all collection efforts, including tax liens and levies.

However, many taxpayers cannot afford to pay their balance in full, especially if penalties and interest have significantly increased the original debt. If full payment isn’t feasible, J. David Tax Law can assess your situation and determine the most effective alternative, such as an installment agreement or settlement.

2. Installment Agreement 

For taxpayers unable to pay in full, the IRS offers Installment Agreements, allowing the balance to be paid over time in manageable monthly payments. There are two types:

• Short-Term Installment Plan: Allows up to 180 days to pay off the balance in full.

• Long-Term Installment Plan: Ideal for larger debts under $50,000, with monthly payments typically spread over 72 months.

• Partial Payment Installment Agreement (PPIA): make monthly payments based on your financial ability, and the remaining debt may be forgiven once the 10-year statute of limitations on IRS collections expires.

While penalties and interest continue to accrue under an installment plan, the IRS halts collection actions like liens and tax levies once an agreement is in place. Our tax attorneys can negotiate an affordable monthly payment on your behalf, ensuring you maintain compliance while protecting your assets.

3. Offer in Compromise (OIC)

An IRS Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the full amount owed if paying in full would cause financial hardship. The IRS evaluates eligibility based on:

• Income and Expenses: Your ability to pay.

• Asset Equity: Value of property and other assets.

• Future Earning Potential: Your capacity to earn and pay off the debt.

While the IRS is selective when approving OICs, J. David Tax Law has extensive experience preparing strong applications that highlight financial hardship and maximize acceptance chances. Read our Offer in Compromise success stories here and see how we’ve helped clients settle their tax debt for a fraction of what they owed.

4. Currently Not Collectible (CNC) Status

If you’re facing significant financial hardship and cannot afford to pay your tax debt, the IRS may classify your account as Currently Not Collectible (CNC). This status temporarily halts IRS collection efforts, including liens and levies, though penalties and interest continue to accrue. To qualify, you must demonstrate that paying the debt would prevent you from covering basic living expenses. 

5. Penalty Abatement 

Taxpayers facing substantial penalties for late payment or filing may qualify for Penalty Abatement if they can demonstrate reasonable cause, such as:

• Medical Emergencies: Serious illness or hospitalization.

• Natural Disasters: Damage or displacement due to hurricanes, floods, or fires.

• Family Tragedies: Death or severe illness in the family.

• Financial Hardship: Job loss or significant reduction in income.

6. Innocent Spouse Relief

If you filed a joint tax return with a spouse who underreported income, claimed false deductions, or failed to pay the tax due without your knowledge, you may qualify for Innocent Spouse Relief. This program removes liability for the tax debt if you can demonstrate that you were unaware of the errors.

Want to know if you’re eligible for Innocent spouse relief? Check out our detailed guide.

What Happens If You Ignore Delinquent Taxes?

Ignoring delinquent taxes can lead to severe financial and legal consequences. The IRS imposes failure-to-pay penalties (up to 25% of the balance) and daily interest on unpaid taxes. If the debt remains unresolved, the IRS may escalate enforcement actions, including:

• Federal Tax Lien: A legal claim against your property affecting credit and asset ownership.

• IRS Levy: Seizure of wages, bank accounts, and personal property.

• Passport Revocation: If your debt exceeds $62,000, the IRS can issue a CP508C Notice, notifying the State Department to deny or revoke your passport.

• Criminal Charges: In extreme cases of willful tax evasion, the IRS may pursue criminal prosecution.

Delinquent taxes, if left unresolved, can quickly escalate into seriously delinquent tax debt.  

The IRS designates serious delinquency when your unpaid balance exceeds $62,000, including penalties and interest. This not only subjects you to increased enforcement actions like tax liens and levies but also puts your passport at risk of denial or revocation under a CP508C Notice. The longer the debt remains unpaid, the more penalties and interest accumulate, making it harder to settle.

Don’t wait until your tax situation reaches this critical stage. Contact J. David Tax Law at (888) 342-9436 or visit https://www.jdavidtaxlaw.com/ for a confidential consultation. Our experienced tax lawyers can help you resolve your delinquent taxes, protect your assets, and prevent serious IRS enforcement actions.