Guide to Delaware Tax Debt: Consequences and Resolution Options
The Delaware Division of Revenue (DOR) collects individual and business taxes in this state. If you don't pay or file state tax returns, you can face severe consequences, including asset seizures, wage garnishments, tax liens, or even criminal persecution in rare cases. The DOR offers several different resolution options for people who can't afford to pay their state taxes, but these programs often have strict approval criteria.
This guide provides an overview of the tax resolution options in Delaware, and then it looks at the consequences of not paying or filing taxes in Delaware. Want help right now? Then, use TaxCure to search for a high-quality local tax pro with experience dealing with the DOR.
Tax Resolution Options in Delaware
If you can't afford to pay your state taxes in full, you may be able to get relief from one of the following programs. However, when you apply, the DOR may request a collection information statement to determine if you qualify for any of these tax relief options. If applicable, the state may require you to sell assets or take out a loan to pay off your taxes.
Tax Payment Plans in Delaware
The Delaware DOR allows qualifying taxpayers to set up installment payments on back taxes. Monthly payments and the length of the payment plan vary based on your situation. To apply, contact the DOR directly or contact a Delaware tax pro to help you.
If you need more than 24 months to pay, you must agree to let the state automatically deduct monthly payments from your bank account or have your employer deduct payments from your paychecks. If you cannot do that, the state will issue a lien against you to secure its interest until you complete the payment plan. If you need more than 48 months to pay off your Delaware back taxes, the Division or Revenue will file a lien.
Offer in Compromise
An offer in compromise is when the state agrees to let you pay off your tax debt for less than you owe. There is no offer-in-compromise program advertised on the Delaware Division of Revenue's website. However, Title 30 §538 states that the state can abate the unpaid portion of tax, interest, and penalties if they are excessive, assessed after the statute of limitations, or incorrectly/illegally assessed. The Director also has the right to abate tax, interest, and penalties if the administration and collection costs don't warrant the collection of the taxes due.
In other words, the state may waive tax liabilities but only in situations where it appears the state will lose money trying to collect the tax. If you can't afford to pay your tax bill, you should talk with a Delaware tax professional to learn more about your options.
Additionally, according to Title 30 §1702 to 1703, the Delaware DOR may be willing to settle income, inheritance, and estate taxes assessed at death in cases where Delaware and at least one other state claim to be the domicile of the decedent. In this situation, the Secretary of Finance may agree to settle the taxes for less than owed, but the State Tax Appeal Board must approve the arrangement. Note that Delaware repealed its estate tax in 2018, so this only applies to the estates of taxpayers who died in 2017 or before.
Innocent Spouse Relief in Delaware
The DOR doesn't advertise an innocent spouse or injured spouse relief program. Innocent spouse relief absolves taxpayers from tax debt liability in cases where their spouse incurred the tax debt without their knowledge. For instance, this can happen if your spouse hides income or lies about deductions on the tax return.
Injured spouse relief applies in cases where the state seizes a joint refund to pay for your spouse's debts due to back taxes, unpaid child support, etc. Even if you cannot get spousal relief on your Delaware state taxes, you should look into innocent spouse relief on your IRS taxes if applicable.
Hardship Status
If you can't afford to pay your Delaware back taxes, the state may temporarily pause collection actions against your account. The DOR will routinely review your financial situation; if it improves, you will be required to pay. Interest and penalties will continue to accrue on your balance while you're on a hardship plan, and the state may file a tax lien against you.
Penalty Abatement
The Delaware DOR does not advertise penalty abatement on its website. However, the state has a history of offering penalty abatement programs — for instance, in 2018, the DOR announced that it would offer some penalty abatement to corporate filers. If the DOR has assessed penalties against you, you can protest them by contacting the DOR or consult with a tax professional to discuss your options.
Delaware Tax Appeals Process
If you disagree with your tax bill in Delaware, you can send a request for a correction to the DOR. Include a copy of your bill, a written explanation of why the tax bill is incorrect, and statements to back up your claims. If the DOR agrees, they will send you an updated tax bill.
During the collection process, if you disagree with the Division of Revenue employee, you can request an administrative review from a supervisor. Once you request a review, the employee must let you know how to contact their supervisor.
You also have the right to appeal DOR decisions and tax assessments. This can be a complicated process. Although you can represent yourself, you should find a tax attorney, CPA, or enrolled agent to help you. You can also have anyone enrolled to practice before the DOR represent you.
Bankruptcy to Eliminate Back Taxes
You can sometimes get taxes discharged through bankruptcy, but only if they meet specific conditions. Talk with a bankruptcy attorney to see if your back taxes can be included in your bankruptcy filing. When you file for bankruptcy, the state will pause collection actions against you while the stay is in place. However, the DOR can continue to assess taxes, request tax returns, and audit your returns during this time.
Collection Processes for Delaware Back Taxes
The DOR can enforce collection actions if you don't pay or file taxes in Delaware. The state has broad rights to file tax liens, seize assets, garnish wages, and take other actions to collect unpaid taxes. Here is an overview of what to expect.
Tax Liens
The Delaware DOR can issue a tax lien against you if you have unpaid back taxes. The lien (sometimes called a tax warrant) attaches to your real and personal property, including property that you acquire after the lien has been issued. If you sell the property, the DOR has the right to the proceeds, and because the lien is a public record, you won't be able to get loans until you take care of it.
You may be able to get a tax warrant removed from a specific piece of property if you are selling the property and paying the funds to the DOR. Alternatively, you may be able to get a warrant removed from a piece of property if you have other property that is worth at least twice as much as your tax bill. If there is a dispute about who deserves the proceeds of a property sale, the state will discharge the warrant as long as the proceeds of the sale are put in an escrow account while the dispute is being resolved.
Tax Levy on Delaware Back Taxes
In Delaware, the DOR has the right to seize and auction off your personal property, real estate, and business property. The DOR can also levy your wages through wage garnishment. If you receive interest or dividend payments, the DOR will contact those entities and tell them to withhold taxes from your payments and send them to the DOR.
Tax Penalties
As of 2022, Delaware assesses interest on unpaid taxes at a rate of 0.5% per month. The interest accrues until you pay the back taxes. It also continues to accrue if you set up a payment plan.
If you don't file your return on time, the penalty is 5% of the balance, which gets assessed monthly until you pay. The penalty is just 1% of the balance if you file but don't pay. The DOR assesses this penalty monthly, and it can get up to 25%. Not paying estimated taxes on time leads to a penalty of 1.5% per month.
There is a 100% penalty for unpaid payroll taxes. These are the taxes that you withhold from your employee's paychecks. If these taxes are unpaid, the state can assess the penalties on anyone deemed responsible. This includes business owners, directors, partners, and third parties such as accountants or bookkeepers. Anyone who decides to pay other bills instead of payroll taxes can face this penalty.
If you willfully neglect or refuse to file a return or pay a tax, you can face a fine of up to $3,000 and up to six months of imprisonment. The same penalties apply if you file a false return, refuse to let the Secretary of Finance examine corporate books, or fail to keep corporate tax records for at least three years. In some cases, these penalties can stack on top of each other.
Refund Offsets for Delaware Back Taxes
In most cases, Delaware will keep your tax refund if you owe back taxes. The state may also seize state tax refunds and send them to the IRS if you owe federal back taxes. Similarly, the IRS may send your refund to the Delaware DOR if you owe state taxes.
Statute of Limitations on Tax Debt Collection in Delaware
Once a tax debt judgment exists against you in Delaware, it lasts for 20 years. This means the state has the right to enforce collection actions throughout this period. In other words, if you have Delaware back taxes, don't ignore them. They won't go away and can worsen over time as interest, penalties, and collection costs get added to your account.
Get Help With Delaware Back Taxes
Need help with Delaware back taxes? Want to talk about your options for resolving unpaid state taxes? A Delaware-based tax professional can help you. They have an in-depth understanding of the state's tax collection practices and resolution programs, and they have experience negotiating with the state's DOR.
In contrast, big tax resolution firms often lack state-specific experience. They are also notorious for overcharging people and failing to deliver the promised results. If you're struggling with back taxes, use TaxCure to search for a local tax pro based in your area and experienced in dealing with Delaware state taxes.