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What Happens When You Owe Taxes in the State of California?

The issue of paying taxes can be confusing. Unlike other things deducted from your income, it’s your responsibility to ensure that your tax payments are up-to-date. Otherwise, you might find out a year or so later that you owe state taxes.

Statistics show that unpaid taxes are around $40 billion each year. This article will examine the possible reasons for paying taxes in California and what happens when you owe taxes.

Possible Reasons for Owing Taxes

There are various reasons why you may be owing income tax. Just because you didn’t owe anything the previous year doesn’t mean it’ll be as smooth this year. Hence, you must check whether your taxes are regularly updated.

Below are some of the possible reasons for owing taxes:

  • Tax bracket change due to increase in income
  • Receiving unemployment funds also counts toward income tax
  • Social security benefits
  • Capital gains
  • Increase in property tax

If you owe taxes and are finding it hard to pay, tax relief firms are a good option. These firms work closely with the IRS and have tax experts to help reduce your debt. 

The FTB Agency Takes Action

When you haven’t been paying for a while, the California Revenue and Taxation Code (R&TC) gives the Franchise Tax Board (FTB) authority to take action toward collecting tax payments. If you and the FTB agree, you can resolve this issue in the following ways:

  • Paying the tax amount you owe in full
  • Paying in installments
  • Prove that you have no filing requirement
  • Negotiate an offer
  • Prove that you’re currently unable to pay due to financial hardships

If you cannot come to an agreement with the FTB and pay, then it’s possible to face involuntary collection actions. These can be done in the following ways:

  • Through tax liens – claiming assets you own to make up for the tax owed
  • Imposing levies
  • Interest rates

You’ll Incur Tax Fees and Penalties

If owing taxes isn’t enough, you may have to pay additional fees or penalties. These depend on the reason you owe taxes. 

These include:

  • A 25% late penalty on late filing
  • A 5% penalty on late payments, on top of that, is an additional 0.5% on every month you don’t pay.
  • If the FTB demands that you file your income tax returns and don’t comply or at least respond, then you’ll be fined 25% of the tax.
  • For a dishonored payment, you’ll be charged 2% for a payment of $1,250 or above. If it’s less than that, then you’ll be charged $25.
  • If you miss a compulsory electronic payment, then you’ll be charged 1% of the amount. However, if you have a good explanation, there may be no penalty.

Actions to Take if You Can’t Afford to Pay Tax

Generally, the FTB can take up to 20 years to collect unpaid taxes. Therefore, if you can’t pay the amount you owe at once, there may be other ways a taxpayer can propose delivering. These can help ensure that involuntary collections that’ll leave you altogether broke aren’t taken. 

Here are some agreements you can make:

Collection Delays

You can ask the FTB for a 30-day extension in the case that you’ll be able to pay the total taxation amount you owe.

Informal Installment Agreements

This works more like a collection delay. A taxpayer can contact the California FTB and ask for a 90-day extension. Your account will be on hold during that period and will not incur any penalties. 

Once you have the money, you can settle your account. If you don’t pay it within the agreed period, your account will be sent straight to collections.

Installment Agreement

When you owe $25,000 or less, you can arrange to pay it within five years in installments. However, the FTB may require you to put a lien on your home or other asset. When you’ve completed the payment, the lien is lifted. The same goes for a taxpayer who owes more than $25,000. The decision to place liens is made after carefully checking your financial situation.

Partial Payment Installment Agreement

When you cannot pay in installments initially determined by the FTB, the period can be lengthened, and payments decreased. This is, of course, after checking your finances to see how much you can afford and how long it’ll take for you to cover the total amount. 

The FTB will examine your finances every two years. If there are changes, then the monthly installments may increase or decrease.

Offer in Compromise

You can negotiate for a price lower than the balance owed. Your age, health, and current and future finances will be considered before making a final decision.

In Closing

Some people intentionally dodge paying taxes. However, you can unknowingly owe taxation. Individuals and businesses must ensure they’re up to date with paying government taxes. 

You can owe taxes for many reasons, including a change in the tax bracket. The sad thing about missing payments is that they may accumulate due to interest, fees, or penalties. 

However, if you owe the state of California or anywhere else, there are ways to pay this debt.

If the FTB has proposed an option you can’t afford, you can negotiate for collection delays, an informal installment agreement, or other pay methods.

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