Consequences and Resolution Options for Back Taxes in North Carolina
Have you gotten a notice from the North Carolina Department of Revenue (NCDOR), and you’re not sure what to do next? Worried that you’re about to encounter some serious tax problems?
The good news is you’re already on our website. The more you educate yourself about the consequences of back taxes and how to resolve them, the easier it will be for you to respond to the NCDOR’s notices and get your tax account back in the black.
The NCDOR is the government organization in charge of collecting and following up on taxes in North Carolina. They follow up on taxpayers who miss important deadlines and remind them to take action urgently. There are penalties for those who don’t file taxes on time and those who don’t pay their tax bill by the deadline.
Remember that the NCDOR simply wants to reach a resolution regarding your tax debt. They don’t want to make your life harder. However, if you ignore your tax bill, they will make your life a lot harder. They can garnish wages, seize assets, and take the funds out of your bank account.
To protect yourself, you need to respond to the NCDOR right away and work with them to pay your debt in full or enter into a payment arrangement. Here’s what you need to know.
North Carolina DOR Tax Problems
There are a few different kinds of tax problems you can encounter with the NCDOR. The NCDOR will send you a notice if you:
- Missed a payment due,
- Didn’t file your tax return on time
- Filed incorrectly and owe additional tax, or
- Were selected for a business tax audit
When you get a notice from the NCDOR, it’s very important to respond right away. Responding to the initial notice lets them know you’re serious about paying the tax due. It can also prevent additional penalties from being added to your account and deter the DOR from taking collection actions against you. If you want to dispute or appeal the tax, a prompt response is critical.
North Carolina DOR Tax Notices
It can be nerve-wracking to be on the receiving end of a tax notice from the NCDOR. If you receive a notice, don’t panic – just read it closely and ensure you understand what it’s saying. The letter will clearly outline the next steps in the debt collection process, whether it’s garnishment, asset seizure, or interest and penalties.
If you’ve read your notice and still have questions, you should reach out to the DOR or contact a tax professional to help. They can help you understand what’s happening and let you know what to do. Here are some common notices that you may receive.
Notice to File a Return
A Notice to File a Return notifies you that the NCDOR has not received your state income tax return for the year in question. When you receive a Notice to File a Return, it’s very important that you respond by filing your taxes immediately.
Responding fast can help reduce the potential interest and penalties that you’ll incur. Even when you haven’t filed yet, your tax debt is still accruing interest and late fees. The sooner you file, the fewer penalties you’ll have to pay.
When you’ve filed your tax return, you must return a copy of the Notice to File a Return to the NCDOR by mail at the address listed on the notice, along with:
- A copy of your tax return
- Documentation to support all deductions or tax credits
- Wage and tax statements (e.g., W-2s)
- Your contact information
You’ll receive a Delinquent Notice from the NCDOR if you don’t file a state return by the due date. You should respond by filing a state return immediately. File online if possible to avoid further delays. Then, contact the NCDOR at the phone number listed on the notice to let them know you’ve filed. If you ignore a Delinquent Notice, the NCDOR’s next move is to assess you for taxes owed.
A Notice of Individual Income Tax Assessment
A Notice of Individual Income Tax Assessment is a document that informs you that the NCDOR has determined that you owe more income tax than you paid during the tax year in question.
You might receive this notice if you:
- Reported taxable income on your state return that didn’t match the federal return,
- Underpaid due to miscalculating tax due,
- Failed to pay your tax bill when you filed, or
- Didn’t file a state tax return (the state will file one on your behalf if you don’t respond to a notice)
If you didn’t tile, the state usually only assesses tax against you if the DOR sends a Notice to File a Return and you don’t respond within 30 days.
The form will indicate that your state return has been adjusted, and it will describe the changes and request that you send supporting documentation if you disagree. You must respond with the required documentation within 45 days.
A Default Notice means that your installment payment agreement is in default status. It can also mean that you filed a return but didn’t pay what you owed. You must respond to a Default Notice immediately, or collection actions will be taken.
Your installment payment agreement can go into default if you don’t follow all of the following rules:
- Make installment payments on time, if applicable
- File tax returns and estimated income taxes on time and pay them in full
- Have a checking or savings account that allows bank drafts
- Respond to periodic reviews of your finances to determine that the agreement is still needed
It’s crucial to respond to a Default Notice immediately. If you don’t respond, you cannot re-establish an agreement – the entire balance of your tax debt becomes immediately due.
If you received the notice because you missed an installment payment, you must make an installment payment immediately or within 30 days of the notice’s date. This automatically reestablishes your payment agreement.
If you filed a tax return but didn’t pay what was due, you must pay the entire balance in full by 30 days past the date on the notice. Then call the phone number on the Default Notice to re-establish the agreement.
If you didn’t file a tax return, you need to file the return immediately and pay the full amount due. After that, call the phone number on the notice to restart the installment payment agreement.
Notice of Collection
A Notice of Collection may appear in your mailbox if you fail to respond to a previous notice in a timely manner (usually within 30 days, but this can vary based on the notice). This type of notice indicates that you are about to be subject to collection actions, typically wage garnishment or asset seizure.
You can respond by paying your tax obligation in full immediately or setting up a payment agreement. Then call the NCDOR at the phone number listed on the notice. It’s not a guarantee that they will respond by canceling the collection actions, but if you act soon enough, it’s possible.
What Happens If You Don’t Pay Your NC Taxes?
If you don’t pay your taxes, the NCDOR has a lot of power to collect them whether you cooperate or not. Here are the collection actions you can expect if the
North Carolina Tax Warrants
If you receive a tax warrant from the state of NC, you should know that this is an indication that you’ve ignored your tax bill for too long and the state is now taking action to collect your debt.
What is a Tax Warrant?
A tax warrant is a legal designation that the government can seize your assets to fulfill an unpaid tax debt. It’s also known as a lien.
A tax warrant can be an indication that you’re about to be subject to:
- Garnishment, or
- Asset seizure (known as a forced collection in NC)
What to Do if You Have a Tax Warrant
If you receive a tax warrant, contact the NCDOR immediately. They may be able to put a stop to it if you set up a payment arrangement or pay your bill in full immediately. If you don’t reach out to the NCDOR, the tax warrant will proceed as stated and you’ll lose wages or property.
North Carolina Garnishment for Back Taxes
Garnishment is one of the consequences you can face for not paying your tax liabilities. The NCDOR can garnish wages without needing a court order.
What is Garnishment?
A garnishment is the legal withholding of money from your paycheck so that it can satisfy your tax debt. During a garnishment, a third party (your employer or whoever is paying you) receives an order to deduct payments directly from your check or bank account.
What to Do if You’re Garnished
Contact the NDOR immediately if you receive a garnishment notice. In some specific cases, the NCDOR can offer garnishment relief if you’re facing financial hardship. Even if you don’t qualify for relief, setting up a payment arrangement can satisfy your tax obligation and lift the garnishment.
North Carolina Asset Seizure for Back Taxes
If you don’t pay your back taxes, you might find that you’re subject to an asset seizure, where a third party (here, the NCDOR) can take ownership of your property to satisfy the debt.
What is an Asset Seizure?
An asset seizure is also known as a forced collection by the NCDOR. In other words, the NCDOR seizes your personal property (e.g., cars, valuables) or real property (e.g., houses, land) and prepares to auction it off.
What is a Certificate of Tax Liability?
The Certificate of Tax Liability is a document stating that there’s been a judgment on your personal or real property to satisfy a tax debt or a violation of NC tax law. When there is a Certificate of Tax Liability (CTL) on the board, your tax liability becomes publicly visible until you satisfy the debt.
What to Do if Your Asset is Seized
If your asset is seized, the only way to get ownership back is by paying your tax debt. That includes the taxes owed for the return year in question, but also the penalties and interest that you incur by not paying on time.
As soon as you know you can pay your tax debt, reach out to the NCDOR and speak to the local Collection Division Office. Even if you can’t pay your tax bill, still reach out as soon as possible. The NCDOR will work with you and help you to know your options. Remember that the NCDOR may let you make installment payments if you can’t pay your tax bill all in one payment.
North Carolina Interest and Penalties for Back Taxes
If you continue to let your past-due tax debt (or overdue return) linger, you’ll face interest and penalties, according to the North Carolina General Statutes. The interest is assessed retroactively beginning from the date the payment was originally due. The penalties vary depending on the tax offense.
How is Tax Interest Calculated?
The interest rate on NC back taxes changes every six months. As of the first half of 2023, it is 7%. Over the last 20 years, the rate has fluctuated between 5 and 8%. You will incur interest on back taxes whether you’re making payments or not.
How Are Tax Penalties Calculated?
For taxes assessed after January 1, 2023, the late payment penalty is 5% of the tax due. For taxes assessed after July 1, 2024, the late payment penalty is 2% of the tax due, and it’s assessed monthly until it reaches 10%.
Failure-to-file penalties are calculated based on the lateness of the return or payment. This penalty is 5% of the total unpaid tax amount. It can get up to 25% of your balance, and it is in addition to the interest that you’ll also be charged.
Tax Deficiency and Negligence Penalties in NC
You are subject to penalties if you fail to report income that constitutes 25% or more of your gross income. This penalty is 25% of the entire gross tax balance.
If you fail to report income that makes up less than 25% of your income, the penalty is 10% of your tax balance.
In situations where the Internal Revenue Service (IRS) assesses a tax deficiency or negligence penalty to your federal income taxes, the state of North Carolina will apply the same penalty to your state income taxes.
Penalties for Informational Returns in NC
If you fail to file an informational return by the due date, you’ll incur penalties of $50 per day, up to a maximum of $1,000. If you file the return in an incorrect format, you’ll be penalized $200.
Penalties for Failure to Report Federal Changes in NC
If you don’t report federal changes to your tax return within six months, you’ll incur the failure to file a penalty (of 5%, up to 25% maximum) and lose your right to receive a state refund.
For example, if the IRS updates your tax return and sends you a notice, you must contact the DOR immediately to let them know your return changed. If you don’t, you can face penalties.
Penalties for Tax Fraud in NC
When failure to pay or file is the result of tax fraud, it can result in a fraud penalty of 50% of your tax debt. You may be subject to this penalty if a tax audit or another determination finds that you had the intent to evade paying taxes.
If you’re assessed the fraud penalty, you cannot be assessed the deficiency, negligence, or failure to pay penalties on top of it. However, you can be subject to failure-to-file penalties if applicable.
Collection Assistance Fee
If you don’t pay your taxes, penalties, or interest within 60 days of the due date, or enter into a payment agreement by the deadline, you will have to pay 20% of the balance of your debt. This fee can apply to payment agreements that are in a default status as well as other balances.
North Carolina DOR Tax Resolutions
If you get a notice from the NCDOR, you have a number of options if you can’t afford to pay your balance in full. You can pursue an installment agreement, tax relief options, a waiver, or an offer in compromise.
What is an Installment Agreement?
An installment agreement can help you pay your tax obligation if it’s financially out of reach. To apply for an installment agreement, you must meet the following qualifications:
- Have received a Notice of Collection
- Have not defaulted on any prior installment payment agreement for the same tax year or tax period
- Have no active warrant for collection of taxes, including attachment and garnishment
The NCDOR will make an exception for these qualifications if you have a wage garnishment for an amount greater than 10% of your gross income.
If you do qualify for an agreement, you must let the NCDOR draft payments directly from your bank account. If your bank account bounces a payment back, it’s considered a failure to pay, and your agreement will go into default status. You can’t restart a payment agreement that’s gone into default, so it’s very important to make scheduled payments on time through autopay.
What is an Offer in Compromise?
An Offer of Compromise is when the NC Secretary of Revenue agrees to settle your tax debt in exchange for an amount that’s less than the total amount due. The state may agree to settle if it appears unlikely that you’re going to be able to pay your debt in full.
To apply for an Offer in Compromise, you need the following documents:
- OIC-100: Offer in Compromise form
- OIC-101: Instructions
- OIC 101-A, B, or C: Worksheet for Individuals, Businesses, or Sole Proprietors respectively
- OIC 102: Third-Party Affirmation
- RO-1062 or RO-1063: Collection Information Statement for Individuals, Sole Proprietors (RO-1062), or Businesses (RO-1063)
Can Tax Penalties Be Waived?
A tax penalty waiver can eliminate or reduce the burden of your accrued penalties. You can request a waiver or reduction of your penalty, but you cannot waive interest unless it happens during a period where you’ve declared Chapter 7 or Chapter 13 bankruptcy.
To receive a tax penalty waiver, you must complete:
- Form NC-5501 for informational returns only, or
- Form NC-5500 for all other returns
Innocent Spouse Relief in North Carolina
North Carolina offers innocent spouse relief. If you have a tax liability related to a jointly filed return and there is a compelling reason that just your spouse or ex-spouse should be held responsible, you may qualify. First, you need to apply for innocent spouse relief on the federal level. Then, if the IRS approves you, the NCDOR will also approve you.
Get Help Resolving Your Tax Problems in NC
Navigating a notice from the NCDOR can be scary and stressful, but it doesn’t have to be. An experienced tax attorney can help you negotiate and communicate with the NCDOR so that you can handle your tax problem with grace and speed.
Reach out to the W Tax Group to get the help of an experienced tax team on your side. Give us a call today at 877-500-4930 to get started. Don’t delay – it’s critical to deal with your unpaid state taxes or unfiled returns right away!