What If I Can’t Pay State Taxes? Is There State Tax Relief?

Most Americans who earn an income are obligated to file a federal tax return every year, but only some are required to file state tax returns. Depending on where you live, you may or may not need to file and pay a percentage of your income to your state’s tax agency. Currently, 41 states assess a state income tax. On top of that, every state has a variety of different business taxes including sales tax and employer taxes. 

If you were unaware of your state tax obligation or didn’t plan for it, you could wind up with a hefty tax bill when you officially file. But if you can’t pay immediately, don’t panic! Thousands of taxpayers find themselves in similar situations each year, which is why state tax resolution options exist.

If you are struggling to pay your state tax burden, you need to know the potential consequences of being late. From there, you’ll want to review your tax debt resolution options to determine what will work best for you. Keep reading to learn more about state tax debt forgiveness and how our firm can help you with late taxes below or contact us for help now.

Are State Taxes Separate From Federal Taxes?

The IRS is in charge of all federal tax returns, but every state also has its own tax revenue agency as well as distinct state tax codes. State tax agencies play a role similar to the IRS because they have the authority to identify taxpayers who owe money to the government and utilize collection efforts.

State tax systems usually require taxpayers to pay the following types of taxes: income, sales, property, and withholding.

Depending on where you live, you may also owe tax money to your local tax authority. Local tax agencies are just like the IRS and your state’s tax agency. They have just as much authority to use collection efforts to ensure you pay what you owe.

Because there are so many different tax agencies and layers of tax laws, it’s crucial to be well-informed regarding the tax codes in your state and local area. That way, you can work on remaining compliant.

Most Common Reasons for State Tax Delinquency

Have you fallen behind on filing or paying your tax burden? If so, then you’re not alone. Each year, thousands of Americans miss the Tax Day deadline or simply don’t have the funds to pay what they owe to the federal and their state’s tax agencies. Below, we’ll go over some of the most common reasons for falling behind on state taxes.

Lack of Money

The number one reason why taxpayers don’t pay their tax debt in full is because they lack the funds to do so. Taxpayers could face this type of circumstance due to experiencing an unforeseen financial situation, not planning out their finances appropriately, or simply not withholding enough money to pay off their tax burden on Tax Day.

If you fall behind on your taxes due to not having the finances to cover your bill, then it’s best to first get current on all your returns and then consider your options for repayment. We’ll go over more about state tax relief programs that you might be eligible for below.

Lack of Knowledge

Another common reason taxpayers don’t pay off their state tax bill is a lack of knowledge. For one thing, some taxpayers might not be fully aware of their obligations. Not every taxpayer is obligated to file state tax returns, including most residents in states like Tennessee, Florida, Alaska, and Texas. Some taxpayers who move states might not know they need to file state taxes in their new area.

Similarly, taxpayers might not know how to file their state tax returns. If you’re not sure how to fill out your returns or where to submit them, then contact a tax professional or tax lawyer who can help you get fully informed so that you can make good tax decisions moving forward.

Honest Mistake or Error

Some taxpayers don’t make their payments on time simply due to an honest mistake, error, or unforeseen circumstances outside their control. For instance, a taxpayer might be unable to pay their tax bill or file in time due to experiencing a natural disaster like a wildfire. If that happens, your state tax agency will work with you to help you get back in good standing and avoid getting further penalized by something outside your control.

Intentional Non-Payment

Unfortunately, some taxpayers don’t pay their fair share of taxes intentionally and willfully. These taxpayers might falsely believe that paying their taxes isn’t necessary or that the state tax agency won’t take the time to pursue collection efforts. Intentional non-payment of your taxes is not only taken seriously by the tax agency but also under the law. You could potentially get charged with a criminal offense such as tax evasion that carries jail time as a sentence.

Consequences of Not Paying State Taxes

If you don’t pay off your state taxes when they are due, you will likely be penalized. The consequences of not paying your state taxes vary from state by state. The IRS charges a failure-to-file penalty of 5% of your unpaid tax bill each month, and many states follow this same rule. Under IRS terms, that penalty can’t exceed 25%. On top of penalties, interest will continue to accrue on any unpaid tax balance. Contact a tax resolution lawyer in your area to learn more about your state-specific or local laws.

Common Enforcement Actions Taken by State Tax Agencies

Each state’s tax authority determines how the collection process will work. Most states utilize similar methods outlined by the IRS to collect what they owe while also respecting a taxpayer’s rights. The names of enforcement agencies and actions vary across state lines, but below, we’ll go over the general terms and conditions associated with the most frequently utilized tax debt enforcement actions.

Garnish Wages

The number one strategy utilized by the IRS and state tax authorities to collect unpaid tax debts is to garnish a taxpayer’s wages. This type of enforcement action is highly effective because it causes the money to be automatically withheld from the taxpayer’s paycheck before the taxpayer can spend that money or utilize it elsewhere.

To garnish your wages, your state’s tax authority will send an official notice to your employer. Your employer will then be obligated to comply with the order and withhold taxes from your paycheck. That money will be sent to the IRS. The employer doesn’t have the authority to ignore the notice.

Issue a State Tax Lien

Another collection effort available to state tax agencies and the IRS is to put a legal lien on your property or levy it. A tax lien essentially gives the tax agency a legal claim to your property, which means they have a right to a percentage of the value of your home as well as your other personal and real property. 

If you ever tried to sell your property, then the IRS or your state’s tax agency would be able to seize all or a portion of that money to settle your tax claim. Note that many states refer to tax liens as state tax warrants.

Levy Your Property

A levy, on the other hand, means that the state tax agency is moving on to the next step and will be seizing your property to cover your debts. Levies can include bank levies and asset levies.

File Criminal Charges

Your state tax agency also has the legal authority to file criminal charges against you if you continue to willingly evade paying your share of your state taxes. Under the law, taxpayers have an obligation to adhere to their state’s tax rules. When a taxpayer refuses to cooperate with their state’s tax authority, then they can get charged with tax evasion. 

Tax evasion can be levied as a federal crime for your federal taxes, but it can also be prosecuted on the state level when you haven’t paid state taxes. If you did file your returns but you attempted to lie or deceive the tax authority with your return, then you could also face tax fraud charges. Both of these criminal offenses carry potential jail time as a sentence.

Restrict Driver’s Licenses and Professional Licenses

When you’re delinquent on your state taxes, your state’s tax authority also has a unique collection effort that they can levy against taxpayers. In nine states, state authorities can opt to decline to renew a driver’s license or even suspend it immediately when taxpayers refuse to comply with paying their taxes. 

Some states do have thresholds of debt that the taxpayer must meet before facing these consequences, but others don’t. For instance, in Maryland, you can be prevented from renewing your license over any unpaid tax bill.

In 16 different states and Washington, D.C., state tax authorities can also suspend or decline to renew professional licenses over unpaid taxes. When professional licenses or a driver’s license get suspended or declined, that can severely impact a taxpayer’s ability to earn an income. Without the ability to drive, a taxpayer may not be able to go to work. Similarly, without the right licensing, a taxpayer may have to pivot careers.

In contrast, the IRS does not deal with licenses as a collection enforcement action. This is just one way that state collection actions can be worse than IRS actions. 

General State Tax Debt Relief Options

If you’ve fallen behind on your state taxes, then don’t panic. Your situation is far more common than you might think. The IRS and all state tax agencies do offer tax debt relief options, but each agency’s relief options may slightly differ. That said, it’s important to research your state’s laws to determine exactly what your options are.

For instance, the IRS offers innocent spouse relief, which helps spouses ditch tax penalties that were acquired on their account by a former partner who was in charge of their returns. If you’re struggling with Georgia tax problems, then innocent spouse relief is an option for you, but that same relief option isn’t available in Tennessee.

The IRS also has the option of offers in compromise, which is a type of negotiation between the IRS and the taxpayer of the amount owed. Some state agencies do not offer these relief options, while others do not. Here are some common state tax relief programs.

Payment Plans

The most common type of tax debt relief strategy is to agree to a payment plan with the tax agency. In general, you’ll agree to pay the tax authority each month. In exchange, the tax authority will agree not to continue to pursue collection efforts against you. If you do fail to make your payments on time, however, then your state tax authority might re-initiate collection efforts against you.

Some payment plans are short-term (less than 180 days), while others can last for years. The payment plan available to you will depend on how much you owe and your overall ability to pay. As a general rule of thumb, states offer much shorter payment plans than the IRS. 

Offer in Compromise

If you’ve fallen into financial hardship, then your state might be able to help you by negotiating an offer in compromise. This type of agreement lets you pay off the tax debt for less than you owe, but typically, you have to make the payment in a lump sum. Not all states have this option. A tax attorney can help you figure out the rules in your state. 

Penalty Abatement

Penalty abatement is a form of tax debt relief that helps you eliminate significant penalties, late fees, and other charges on your account. Penalty abatement isn’t available for every taxpayer, though. To be eligible to qualify for this type of relief, you generally have to show your state tax agency that you had a legitimate reason for nonpayment. 

For instance, you may have experienced losses due to a wildfire or natural disaster, or perhaps, you’re usually compliant and this is your first offense. When that’s the case, your state tax authority may decide to work with you to reduce your overall tax burden.

How to Navigate Your Tax Situation With State Tax Agencies

When you fall behind on state taxes, navigating your situation and getting in touch with tax representatives can be very intimidating. Since state tax agencies have a lot of authority, you need to handle the situation very carefully. 

One of the best things you can do to ensure your rights are upheld is to speak with a tax resolution attorney before contacting a tax agent. Below, we’ll go over some basic advice to help you get through your situation.

Get in Touch With Your State Tax Agency

After you’ve consulted with an attorney, reach out to the tax agency. If you have a simple situation, you may feel confident taking this step on your own without an attorney.  

Use the notices you’ve received about your tax situation to find the right contact information for the agency. Before you reach out, be sure to analyze your financial situation. Make sure you understand what the tax agency thinks you owe, how much you think you owe, and your ability to pay. That way, you can be better prepared for the next steps.

The Negotiation Stage

Once you’re in touch with an agent, you’ll need to start the negotiation process. Keep in mind that negotiating with tax agencies is a bit tricky considering there is a clear power and knowledge imbalance between you as a taxpayer and the tax agent. 

For that reason, it’s usually best to have a legal advocate speak on your behalf. During negotiations, you’ll lay out your ability to pay as well as your entire tax situation. You’ll want to provide the agent with any missing financial information or details that aren’t in your case yet as well as explain how much you can pay. Together, you and the agent will find a tax relief solution that works in your situation.

The Importance of Seeking a Tax Professional’s Help

Without tax representation, you might not get the best deal and could instead get hit with unnecessary collection enforcement actions. A lawyer will make sure that you’re fully informed and empowered to make good decisions about your tax situation moving forward.

National Companies Versus Local Representation: Why it Matters

If you’re looking for a tax professional, then you may be tempted to go with a big, national company. Keep in mind that most of these bigger companies only handle federal taxes and not state tax returns. 

That said, you’ll want to find a company that can resolve both issues for you. Local representation is often preferred when you’re dealing with state taxes because those lawyers will be well-versed with state and local tax codes.

Get in Touch With a State Tax Resolution Lawyer

Do you currently owe a tax debt to your state’s tax agency? If so, then you need to be aware of the potential consequences of non-payment as well as your options for resolving your debt. Depending on your situation, you may qualify for state tax debt forgiveness or other state tax relief services.

Here at W Tax Group, our team of tax resolution attorneys can help you resolve all your state tax issues and/or federal tax problems with the IRS. We’ll help you identify your options and negotiate with your state’s tax agency. Regardless of how complex your situation feels, you can rely on our expertise, knowledge, and experience to help you navigate your tax case.

Schedule a meeting with our firm now to learn more about your state tax debt relief options.