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Debt is a burden that millions of Americans face, and managing it effectively is crucial for financial health. When balancing multiple obligations, such as tax debt owed to the IRS and credit card debt, many people may wonder which to prioritize. While both types of debt can have significant consequences if left unpaid, tax debt should typically be addressed first for several compelling reasons.
IRS Debt Collection Process
The IRS has far greater power to collect debt than credit card companies. The government can take aggressive actions to recover unpaid taxes, including:
- Wage Garnishment: The IRS can garnish your wages without a court order, meaning a portion of your paycheck will automatically go toward paying your tax debt until it’s settled.
- Bank Levies: The IRS can seize money directly from your bank account to cover your outstanding tax balance.
- Liens and Levies on Property: If you owe the IRS, they can place a lien on your home or other valuable assets, making it difficult to sell or borrow against them.
In contrast, credit card companies must have a court order to garnish wages, place a lien on property, or seize assets.This provides you more time and leeway to negotiate or settle the debt.
IRS Penalties and Interest Accumulate Rapidly
If you fail to pay your taxes on time, penalties grow by 5% monthly, up to 25% of your balance. In contrast, there is no cap on interest, and any balance owed continues to accrue daily. If not dealt with promptly, tax liability can quickly spiral out of control.
The IRS Offers Fewer Leniency Options
Credit card companies often offer flexible solutions for debt management, such as lowering interest rates, offering settlement plans, or even forgiving part of the debt. While negotiating a lower payment or a debt settlement with credit card companies is more common, the IRS tends to be less lenient.
While the IRS offers Installment Agreements and Offers in Compromise (OIC), they are generally harder to qualify for, and the terms are stricter. Additionally, the IRS scrutinizes your financial situation more closely before offering relief, which can make it harder to negotiate favorable terms.
Tax Liens and Credit
Tax liens do not affect your credit score. However, it may make it very difficult to get additional credit, secure loans, or even get favorable interest rates. Once a lien is filed, it becomes public record, and any potential creditor can see it. This is problematic because it signals that you have failed to meet financial obligations in the past.
Additionally, a lien can make it impossible to refinance or sell property without first paying the IRS. In comparison, credit card debt, while damaging to credit scores if unpaid, doesn’t automatically trigger such serious consequences as liens.
Difficulty in Discharging Tax Debt in Bankruptcy
If you’re struggling with a heavy debt burden, bankruptcy may be an option to consider for wiping out credit card debt. However, tax debt is notoriously difficult to discharge in bankruptcy, especially recent tax debts. There are strict guidelines that must be met for tax debts to be forgiven through bankruptcy, and even then, it’s often not possible.
In contrast, credit card debt is generally easier to eliminate in bankruptcy proceedings. This makes it more important to pay off tax debts first, since they’re less likely to be relieved in the event of a financial crisis.
Legal and Criminal Consequences
Failure to pay credit card debt can result in legal action from creditors, but it rarely leads to criminal charges. However, failing to pay your taxes could, in extreme cases, result in criminal charges for tax evasion or fraud. While this is rare and typically reserved for those who willfully avoid taxes, it’s a risk that should be avoided by staying current on your tax payments.
Payment Plans and Negotiation Options
The IRS does offer payment plans, known as Installment Agreements, which allow taxpayers to pay off their tax debt over time in monthly payments. Though interest and penalties still accrue, these plans ensure taxpayer compliance with the IRS, , helping taxpayers avoid immediate, aggressive collection actions like liens or levies.
Does Credit Card Debt Affect Taxes?
Credit card debt does not generally affect taxes. However, if your credit card debt was forgiven, cancelled, or settled for less than you owe, and the difference between what you owe and what you pay is over $600, the IRS may count the amount no longer owed as taxable income.
Get Tax Relief Services to Help with Debt Management
Tax relief services go beyond helping you file an annual tax return. Enrolled agents and CPAs with years of experience have a strong understanding of how to maximize your tax savings. The amount you save in taxes can be used to help pay off further debt, including credit card debt. While it’s important to manage all forms of debt, tax debt should be the first priority because of the serious collection actions the IRS can take, as well as the rapid accumulation of penalties and interest.
If you are ready to get help planning for a better financial future, contact Priority Tax Relief today!
