North Carolina Tax Resolution Options for Back Taxes
The Department of Revenue (DOR), a cabinet-level executive agency, is responsible for administering tax laws and collecting NC taxes. The governor appoints the Secretary of Revenue.
Do you owe back taxes to North Carolina? Perhaps you lost your job or were in the hospital. Maybe you just had a hard year and didn’t have enough money to pay your state income taxes. Whatever the reason was, you should know what will happen if you don’t pay NC state promptly. Furthermore, you should also understand what your tax payment options are. Before pursuing most NC tax resolution options, taxpayers usually need to receive a final notice of assessment.
North Carolina Individual Income Tax Options
The State of North Carolina offers a variety of options to taxpayers who owe the state income back taxes. These tax resolution options are for taxpayers so they can reach a resolution with the state regarding unpaid tax liabilities. This list is not all inclusive but can give taxpayers an idea of some tax options available.
NC Installment Payment Agreement
North Carolina offers an Installment Payment Agreement. Many may also refer to it as a tax payment plan or installment agreement. With this option, if the taxpayer cannot pay the balance in full, they can pay it over time. The type of tax and the amount owed usually determine the duration of the Installment Payment Agreement. Taxpayers can find out more about NC’s installment payment agreement here.
NC State Offer In Compromise
North Carolina’s DOR has an Offer In Compromise (OIC) program for qualifying and financially distressed taxpayers. With this tax resolution, a taxpayer can pay a lump sum to settle their tax liabilities in full. The OIC tax program may also be an excellent alternative for taxpayers who cannot comply with an installment payment agreement. Taxpayers can read more about this tax resolution option here.
NC Innocent Spouse Relief
In North Carolina, spouses are jointly and severally liable for the taxes that are due (e.g., married filing jointly). However, a spouse will be allowed relief from a joint state income tax liability that is attributable to a substantial understatement by the other spouse if the spouse qualifies for innocent spouse relief of tax liability for federal tax due to the same “substantial understatement” by the other spouse under Internal Revenue Code Section 6015.
It is the only type of innocent spouse relief offered by North Carolina G.S. § 105-153.8(e).
There is no time limit specified by the North Carolina statute to file. In comparison, to qualify for innocent spouse relief under Internal Revenue Code Section 6015, taxpayers must file Form 8857 no later than two years after the first IRS attempt to collect the tax from the taxpayer that occurs after July 22, 1998.
A taxpayer may also consider bankruptcy to discharge NC tax liabilities. However, some tax liabilities are non-dischargeable. For example, trust fund taxes (sales and withholding taxes), income taxes (including extensions) due within three years of the bankruptcy petition date, or tax liabilities due to unfiled or fraudulent tax returns. If a taxpayer considers this option, they should reach out to an experienced bankruptcy attorney.
NC Tax Penalties for Not Filing or Paying Income Taxes
If a taxpayer does not pay their income tax in full on time, the unpaid tax is subject to penalty and daily accruing interest. Taxpayers will also be subject to both civil and criminal penalties.
Failure to Pay and File Tax Penalties
If a taxpayer doesn’t pay or file their state income taxes in North Carolina, they may be subject to the following penalties:
- Failure to file penalties – Returns filed after the due date are subject to a failure to file penalty of 5% of the net tax due for each month or part of a month that the return is late (maximum of 25% additional tax).
- Failure to pay penalties – If a taxpayer fails to pay their tax on time, NC state will assess a late payment penalty of 10% of the tax not paid by the original due date. If the taxpayer files a timely extension, the penalty will only apply to the remaining balance due if the tax paid by the original due date is less than 90% of the total amount due. If the taxpayer paid at least 90% of the total tax due, DOR expects the taxpayer to pay the remaining balance before the expiration of the extension period to avoid late payment penalties. DOR will not assess the late payment penalty if the taxpayer pays the amount due with the amended return. Additional tax due is subject to the 10% late penalty if DOR does not receive the tax payment within 45 days of the assessment or a Request for Departmental Review is filed promptly.
Fraud, Negligence, Frivolous Tax Return Penalties
- Large tax deficiency and negligence penalties – If a taxpayer understates their taxable income, in an amount equal to 25% or more of gross income, the 25% large individual income tax deficiency or other large tax deficiency penalty will be assessed. If the taxpayer understates their income by less than 25%, a 10% negligence penalty may be applied. If the taxpayer had an accuracy penalty assessed for federal income tax purposes, DOR will assess the 10% negligence penalty for State income tax purposes, unless a larger deficiency penalty applies.
- Fraud – If a taxpayer received a fraud penalty from the federal government and their state return was based on that fraudulent return, they will also be assessed a 50% fraud penalty for state purposes. If taxation authorities assess a fraud penalty, the state cannot also assess a taxpayer for negligence, large tax deficiency, or failure to file for that same deficiency.
- Frivolous return – If a taxpayer files a frivolous return, the state may assess up to a $500 penalty. A frivolous tax return is one that both fails to provide sufficient information to permit a determination that the tax return is correct and positively indicates the tax return is incorrect and evidences the intent to delay, impede or negate the State or purports to adopt a position that lacks seriousness.
Other Tax Penalties Assessed by North Carolina
- Failure to report federal changes – If the taxpayer fails to report changes in federal tax returns within six months of being notified by the Internal Revenue Service, the taxpayer may be subject to the failure to file penalty and will forfeit the right to any refund.
- Insufficient funds penalty – If a taxpayer writes a bad check, they will be assessed a penalty. DOR will assess a penalty of 10% of the check amount. The bad check penalty has a maximum of $1,000.
- Collection assistance fee – The state assesses a 20% collection assistance fee for any tax, penalty, or interest not paid by the taxpayer within 90 days from the payment due date. It does not apply if the taxpayer begins making payments under an installment agreement that became effective within those 90 days.
- Underpayment of estimated income tax – If interest on the underpayment of estimated income tax is due, that amount must be added to the tax due.
G.S. § 105-236 specifies additional tax penalties for taxpayers to review.
Interest accrues on any unpaid tax from the original due date. It accrues on overpayments beginning 45 days after the latest of
- (1) the date the taxpayer filed the final return,
- (2) the date the final tax return was due to be filed, or
- (3) the date of the overpayment.
On or before June 1 or December 1 of each year, the Secretary of Revenue establishes the interest rate for the next six month period. The interest rate for January 1st, 2019 to June 30th, 2010 is 5%. Taxpayers can find quarterly interest rate updates here.
There are many options available for taxpayers who cannot pay NC tax liabilities in full. Some tax resolutions are more accessible than others. If taxpayers do not address past due tax liabilities, eventually NC State will proceed with enforced collections. Enforced collections may include a Certificate of Tax Liability (similar to a tax lien). It may also include wage garnishment, and bank account levies (garnishment) among other things. Therefore, taxpayers should address tax issues as soon as possible. Moreover, consulting with or hiring a licensed tax professional can make the process of tax resolution a lot easier.
Disclaimer: This article is not legal or tax advice. This article should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.