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Tax debt and interest

When a person has a tax debt, promptly talking with an attorney about what steps they might be able to take in relation to the debt is important. When a person doesn't understand the options available to them, it could lead to them delaying in addressing the debt.

Delays in addressing a federal tax debt can have many negative consequences. For one, they can lead to a substantial increase in the amount of money the person owes the Internal Revenue Service.

One reason for this is that there are generally penalties related to overdue taxes, and these penalties can build up to pretty substantial levels over time. 

Another reason for this is that tax debt is typically subject to interest. Interest will generally continue to build as long as parts of the debt remain unpaid.

An important thing to note about the interest rate on tax debt is that it is not at one constant level, but rather changes over time. Specifically, it is adjusted quarterly.

Also, it is important to note what interest is calculated on when it comes to a tax debt. In each interest calculation, interest is not just calculated on the amount of tax debt that is unpaid, but also on the unpaid penalties and interest that have arisen in relation to the debt. Thus, the amount of extra money interest ends up adding to what a person owes to the IRS can grow to extremely large levels if a tax debt is left unpaid for a substantial amount of time. 

Skilled tax attorneys can help answer questions taxpayers have on tax-debt-related interest and what effects different types of strategies for addressing tax debt might have on how much interest a person ends up facing in relation to a tax debt.

Source: FindLaw, "Penalties and Interest," Accessed Jan. 27, 2016

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