Most people file and pay their taxes by April 15. But more Americans than ever owe past-due taxes.
As of the end of 2022, 18.6 million individual taxpayers owed the Internal Revenue Service $316 billion in overdue taxes, according to the agency. That number is up from 16.8 million owing $308 billion in September 2019.
One reason for the increase is that many people accustomed to getting a refund in April are finding they have a balance due instead. They might not have the means to pay and end up in collections. A related reason is that many IRS collections efforts were paused during the pandemic, which reduced the number of taxpayers paying off their debts.
Now that the IRS is restarting normal collection efforts, tax professionals are advising clients to pay up or negotiate with the IRS, before the IRS comes calling.
“For people who owe, this is the time to be proactive,” said Cynthia Leachmoore, an enrolled agent in Soquel, Calif.
Who owes the IRS money?
The dollar amount of tax debt people owe varies widely. For five million taxpayers, their debt is under $1,000. Nearly 6.3 million taxpayers owe between $1,000 and $5,000. Yet some owe in the hundreds of thousands or more than a million dollars.
The National Association of Enrolled Agents cited an example of a medical doctor who hadn’t filed since 2019 and owes $1 million in an appeal to the IRS to restart paused collection notices. Another example from the group: a mortgage broker who hadn’t filed since 2013 who contends that the longer she goes without filing, the less likely she’ll have to pay taxes on old balances that generally drop off the IRS books after 10 years.
Using new funding from the Inflation Reduction Act, the IRS is going after high-income, high-wealth individuals who have either not filed their taxes or failed to pay what they owe. Dozens of IRS workers are focused on these high-end collection cases, and have collected $520 million owed to the agency, the IRS announced last week.
“The IRS knows these individuals are out there. They haven’t had the budget to go after them, but they have the budget now,” said Buck Buchanan, a managing director at Grant Thornton’s national tax practice.
Why do more people owe the IRS money?
There are two main reasons for the file-and-owe trend, tax professionals said.
For workers who get a steady paycheck, taxes are withheld, but the withholding might not be enough. If you or your spouse get a higher-paying job, or if you have investment gains, you should do a withholding checkup and complete a new W-4 withholding form with your employer.
“People are caught off guard that they can owe tax beyond what’s withheld in their paycheck,” said Jon Call, an enrolled agent in White Bear Lake, Minn.
The rise in the gig economy is another factor. Gig workers have to pay taxes throughout the year in quarterly estimates. If they don’t, they’ll get a surprise balance due at tax time, and possibly an underpayment penalty too.
Penalties and interest grow
The danger of owing the IRS back taxes is the debt will keep growing. Penalties and interest accrue until you pay in full, so the sooner you pay, the better. If you’re unable to pay in full, the IRS offers payment plans, and in special cases, taxpayers can settle their tax debt for less than what they owe.
In an effort to collect back taxes for 2020 and 2021, the IRS waived late payment penalties for certain taxpayers who pay by April 1. Taxpayers started getting special notices listing their revised balances this month.
For tax year 2022, it’s business as usual, IRS Commissioner Danny Werfel said at a UCLA Extension tax conference in October. That means taxpayers who owe get an initial balance due notice, followed by a series of more aggressive notices demanding payment.
The IRS sends out annual balance-due reminders to anyone with a tax debt. Erin Collins, the national taxpayer advocate, an IRS watchdog, has called on Congress to increase those notices to quarterly, noting that most private-sector businesses send delinquency notices to debtors monthly.
“By sending infrequent billing notices, the IRS receives fewer payments from taxpayers, and as a result, more taxpayers face aggressive IRS collection actions such as levies and liens,” she wrote in her latest annual report to Congress.
Tax liens and levies are key IRS enforcement tools, and as IRS resources declined and the pandemic followed, their numbers dropped precipitously. However, there has been a slight uptick in the past year and there’s more to come as the IRS ramps up enforcement.
The simplest way to avoid a lien or levy: pay up. In some cases, you may be able to avoid a lien, and certainly a levy, if you have a payment agreement in place, and that cuts the late-payment penalty in half.