You are meeting with your tax preparer and hear those words, “You owe this year”. You paid income tax, but more tax is due. What you do next, is a critical step in this process. Millions of taxpayers have tax debt; you are not alone. Many people do not file or file and are unable to pay their taxes due. Sometimes there is a significant health challenge, job loss or a catastrophic event that depletes resources. All of these are legitimate challenges and can be discussed but what happens next, is critical. If the taxpayer does not pay their taxes due in full when the tax return is filed, the IRS sends a bill. This bill is the first step in the IRS collection process. Many people receive this letter and place it in the trash with hopes that it will go away. This is not a great action plan. The amount due is subject to interest and penalties. You are meeting with your tax preparer and hear those words, “You owe this year”. You paid income tax, but more tax is due. What you do next, is a critical step in this process. Millions of taxpayers have tax debt; you are not alone. Many people do not file or file and are unable to pay their taxes due. Sometimes there is a significant health challenge, job loss or a catastrophic event that depletes resources. All of these are legitimate challenges and can be discussed but what happens next, is critical. If the taxpayer does not pay their taxes due in full when the tax return is filed, the IRS sends a bill. This bill is the first step in the IRS collection process. Many people receive this letter and place it in the trash with hopes that it will go away. This is not a great action plan. The amount due is subject to interest and penalties.
What if I don’t Pay My Taxes?
If you don’t pay your bill, the IRS will send at least one more bill. The IRS will include an explanation of the balance due reflecting the amount of tax, any penalties and interest that have accrued from the date the tax was due. The letter requests payment in full. If you have the funds to pay the full balance that’s where it ends. If that is not possible, there are other options to consider. Financing the payment by a cash advance on a credit card or taking out a loan are considerations. These are good options if the interest rate is less than what is accumulating on the debt in interest and penalties with the IRS. The Failure to Pay (FTP) penalty is .5% of the unpaid taxes each month and can be as much as 25% of the unpaid taxes.
If the taxpayer owes less than $100,000.00 including the tax, penalties and interest, a short-term payment plan of up to 180 days may be an option. If payment in full is not possible within 180 days, the taxpayer may qualify for an installment agreement. The taxpayer can apply for these agreements online, by completing an Installment Agreement Request or by calling the IRS phone number listed on the balance due notice. There is a fee to set up an installment agreement although there are circumstances where that fee is reduced or waived.
What If I Can’t Pay My Taxes?
If you cannot pay the full amount due in an installment agreement, the taxpayer can apply for an Offer in Compromise (OIC). An OIC is a program run by the IRS to assist individuals who are having a difficulty paying their tax debt. Individuals who are eligible, can settle their tax debts for less than the full amount owed by using this option. In order to be considered for this program, all tax returns must be filed and all estimated taxes for the current year must be paid. Individuals with open bankruptcy proceedings are ineligible. If you cannot pay all of your tax debt at once, an IRS Offer in Compromise may be a good choice for you. Please refer to IRS Offer in Compromise post for more detailed information. We provide a step-by-step guide to the complete the forms required for an OIC here: A DIY Guide on Relieving Your Tax Debt.
Other IRS collection options include partial pay installment agreements, ability to pay agreements, placing your debt in a status of not collectible which delays collection but the balance continues to accrue interest and penalties. The IRS may file a Notice of Federal Tax Lien which is a legal claim to your property. Once a lien is in place, typically it is not released until the tax, penalty, interest and recording fees are paid in full. The IRS will release the lien within 30 days after the tax debt is paid in full. There are some limited circumstances in which the IRS may withdraw a Notice of Federal Tax Lien. A lien is a legal claim to property and includes property acquired following the lien as well.
The IRS also has the authority to seize or levy assets such as money in your bank accounts, retirement income, Social Security benefits, real estate or even cars, boats and future tax refunds due to you. There are procedures that the IRS must follow in order to levy assets.
What Can I Do About My IRS Tax Debt??
If you are facing this challenge of tax debt, there is help available. You can contact an attorney, a tax professional like a CPA, or sometimes help is available depending on income qualifications through a Low Income Tax Clinic. There is also an independent organization within the IRS called the Taxpayer Advocate Service. More information can be found here: www.taxpayeradvocate.irs.gov.
After evaluating your options, if would like to consider submitting an Offer in Compromise, there is a product available that can walk you through step-by-step and provide the tools to complete the necessary forms yourself. Act now for a cost-effective solution: