In addition to the actual amount of the delinquent taxes, ($12,000 in our example), the IRS adds INTEREST AND PENALTIES to your bill. An overview of each follows.
Charging INTEREST on delinquent taxes is clearly a part of the INTERNAL REVENUE CODE, so the IRS will apply interest to the unpaid tax amount. Why? Well you're using the Governments' money (by not paying the taxes), therefore the Government will charge you for it, a normal business practice. But in addition, under Internal Revenue Code 6622, interest is compounded daily. It's interest on top of interest so the total debt adds up very quickly.
Even though the interest rate may not be a killer, the real problems arise from the IRS PENALTIES. Here's why.
Penalties were designed to get taxpayers to comply with the law by paying their taxes when due. Therefore, the logic says, if additional charges can be applied, the taxpayer should have more incentive to pay his taxes when due. It makes some sense, but didn't all the problems in our EXAMPLE start when the business of the taxpayer failed? There was just enough money left from the income he did have to pay rent, buy food, and clothe his family. And the $150 he did have left wasn't going to put him in the "lap of luxury". "So what do they expect?" you ask. Well, they expect all of us to pay our taxes when due, otherwise the additional charges will occur in the form of PENALTIES.
There are numerous types of penalties, such as; Failure to File, Failure to Pay When Due, Failure to Pay Within 10 Days of Notice, Negligence, Bad Check, Fraud, etc., etc., etc. You get the idea. So using our $12,000 delinquent tax bill example, here are some of the reasons why it's exploded to $24,000 over 5 years:
And when you put them all together, our experience indicates that on the average, the tax amount originally owed will DOUBLE in FOUR to FIVE YEARS. That means what you could legally owe the IRS by now is about $24,000 !! And guess what....
THE IRS HAS THE LEGAL RIGHT TO COLLECT EVERY SINGLE PENNY OF THE $24,000.