The last few years have been tough financially for millions of Americans. Between persistent inflation, rising living costs and economic uncertainty, a growing number of households are finding themselves deeper in debt, including to the Internal Revenue Service (IRS). While tax debt may not always grab headlines like credit card or payday loan debt, for those dealing with it, the burden can feel just as heavy.

The IRS hasn't exactly made things easier, either. The federal agency is known for its aggressive collection tactics, from levies to wage garnishment, and when you have unpaid tax debt, the fees and penalties can accrue quickly, making it tough to catch up. So, what starts as a few thousand dollars in unpaid taxes can quickly balloon into tens of thousands of dollars as the penalties and interest pile up.

But here's the thing: Many taxpayers also make preventable mistakes that only worsen their situation. These types of tax debt mistakes can lead to costly penalties and serious legal trouble, so it's important to know what they are — and how to avoid them. 

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6 tax debt mistakes that could cost you thousands of dollars

Here are some of the most common and expensive mistakes people make when it comes to tax debt.

Assuming that the debt is too small to matter

Plenty of taxpayers think they're flying under the radar because they only owe a few thousand dollars or just skipped filing for a year or two, but the IRS doesn't forget. It may take months or even years to catch up, but the agency has systems in place to flag unfiled returns and unpaid taxes. And, during that time, these small tax debts grow quickly due to interest and penalties. The IRS can also file a return on your behalf — — which typically doesn't include deductions or credits you'd be eligible for. That can leave you responsible for more than you actually owe.

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Ignoring letters from the IRS

It can be tempting to toss aside letters from the IRS, especially if you're already feeling overwhelmed financially, but this is one of the biggest and most common mistakes people make. IRS letters often contain information about important deadlines, and missing those could mean automatic penalties, enforcement actions or loss of appeal rights. And, in some cases, ignoring a notice could even trigger a wage garnishment or bank levy, especially if you've already racked up several missed payments.

Thinking you have to pay the tax debt all at once

Many taxpayers panic when they get a bill they can't afford. Here's what they don't always realize, though: The IRS offers multiple payment options, including installment agreements that let you pay over time, with the amount dependent on your balance and financial situation.

You might also qualify for an Offer in Compromise, which allows you to settle your tax debt for less than the full amount if you can prove financial hardship. There are also hardship deferrals and temporary for those who truly can't pay.

Not filing just because you can't pay

You should always file your return on time, even if you can't afford to pay your tax bill. Why? Because the failure-to-file penalty is far steeper than the failure-to-pay penalty. The penalty for failing to file is 5% of your unpaid taxes per month, up to 25%, versus 0.5% per month for not paying on time.

Filing late also makes your total tax debt climb even faster, and it tells the IRS you're not taking the situation seriously. Filing on time, even without payment, signals that you're willing to cooperate.

Hiring the wrong kind of help

When you're desperate for a solution, it's easy to fall for ads promising to wipe out your tax debt. Not all tax relief companies are created equal, however. While many are reputable, some charge high fees for services you may not need. Others might steer you toward solutions without evaluating whether you qualify. So, it's crucial to work with a qualified, licensed professional who can assess your situation honestly and recommend the right course of action.

Believing bankruptcy will wipe out all tax debt

While bankruptcy can discharge certain types of tax debt, it doesn't wipe out all of it, and the timing matters. For federal income tax to be dischargeable, the debt must be at least three years old, the return must have been filed at least two years ago and the IRS must have assessed the debt at least 240 days prior.

Other types of tax debt, like payroll taxes, are never dischargeable. Plus, penalties and interest might still apply even if the principal is forgiven.

The bottom line

Tax debt doesn't have to ruin your financial future, but the mistakes people make while trying to handle it — like failing to file, assuming you can't afford help or avoiding IRS communication — often do. The good news is, though, that most of these pitfalls are avoidable with the right knowledge and a proactive approach. And, the IRS also has more tools and programs available to help struggling taxpayers than most people realize. However, you have to take action to access them.