[Updated 2020] Do You Owe Back Taxes? Here's What You Can Do To Get The IRS to Go Easy on You.
It's tempting to procrastinate when you get a letter from the Internal Revenue Service (IRS) that you owe back taxes, but that is the worst thing to do. If you ignore collection efforts from the IRS, things will only get worse, and you will owe more in interest and penalties.
A Maryland tax attorney can protect your legal rights if you owe back taxes. We can work with the IRS to minimize harsh collections practices and help you rebuild your financial life. Having a lawyer deal with the IRS on your behalf can reduce your stress and achieve an arrangement that allows you to get back to a normal life.
What Can Happen If You Do Not Make Payment Arrangements with the IRS
The IRS would rather work out payment arrangements with you than pursue formal collection efforts, but if an individual or business does not respond to notices from the IRS, the IRS can do these things to collect your back taxes:
Garnishments. The federal government can seize your wages, Social Security benefits, bank accounts, and retirement income to pay your tax bill, interest, and penalties.
Seizures of property (your car, real estate, motorcycle, boat, or property) that the IRS will sell to pay your back taxes. A seizure of property is the same thing as a levy. The IRS usually sends a notice they will seize your property if you do not request a hearing, make payment arrangements, or pay your tax bill in full within 30 days of the Notice of Intent to Levy and Notice of Your Right to a Hearing.
Tax refund intercepts, in which the IRS seizes your future state or federal tax refunds to pay your tax debt.
Federal Tax Lien. If you do not pay your taxes when you get your first tax bill from the IRS, there will be an automatic federal tax lien. The federal tax lien gives the government a legal claim to all of your current and future property, including your wages, bank accounts, car, house, and other assets.
Notice of Federal Tax Liens are public notices to your creditors you owe back taxes, and the government has a legal claim to all of your current and future property.
These actions can cause unpleasant and embarrassing consequences. You can avoid these situations by responding quickly to correspondence for the IRS.
Owing back taxes can prevent you from traveling internationally. If the IRS certifies that a person has a seriously delinquent tax debt, the Department of State will not issue or renew a passport to that person. The Department of State has the option to revoke the individual’s passport.
Letters and Notices from the IRS
Despite what you might see in some scam emails, the IRS does not come to your house during the night, knock down your door, and take all your valuables to pay your back taxes. The IRS will try multiple times to contact you and work something out before taking action, like garnishing your wages.
Do not always assume that a letter from the IRS is a notice of doom and gloom. The IRS sends notifications and letters when:
You owe money on taxes.
There are delays in processing your return.
Your refund should be larger or smaller.
The IRS needs additional information or has a question about your return.
They need to verify your identity.
The IRS changed your tax return.
Always make sure the letter or notice you receive is actually from the IRS and is not fraudulent. You can call the IRS at 800-829-1040 to verify whether the IRS sent the correspondence you received.
Responding To The Notice
If you receive a letter from the IRS that says you owe back taxes, send a written response letter before the deadline, particularly if you disagree with the decision of the IRS. Doing so will preserve your right to appeal and minimize interest and penalties. Always keep a physical copy or scan of your response letter.
The IRS Collection Process
Let’s say you file your tax return and you owe taxes, but do not send payment in full with your return and do not contact the IRS to make payment arrangements. Here is what you could experience in many cases:
1. The IRS will calculate the tax you owe, plus interest and penalties. They will send you a bill for this amount.
2. If you do not pay or respond to the first bill, the IRS usually sends you at least one more bill. Interest and penalties increase the amount you owe with each passing day, so it does not pay to procrastinate.
3. If you do not enter into a payment agreement or respond to the IRS, they will start collection procedures after you get your final bill. The IRS can seize your property and assets. They can intercept your tax refunds in future years until your back taxes get paid in full. A Revenue Officer could visit your home or office without an appointment.
Getting a tax attorney on board right away can be a good option to avoid some of these collection efforts.
Interest And Penalties
Interest and penalties can cause your debt to the IRS to skyrocket. Interest starts to accrue on the day your taxes were due and continues until you pay your balance in full. Although the IRS determines quarterly what the interest rate will be, the interest compounds daily. The interest rate formula is the federal short-term interest rate plus three percent.
On top of interest, the IRS assesses separate penalties for not paying taxes on time and not filing a return on time. Here is how those penalties work:
The failure-to-pay penalty can be up to 25 percent of the unpaid taxes. The IRS charges one-half of one percent for every month or portion of a month you owe back taxes, up to 25 percent. If the IRS sends you a notice of intent to levy property and you do not pay the back taxes in full within 10 days of the notice, the penalty increases to one full percent.
Making installment payment arrangements can decrease the penalty substantially. When your payment agreement is in effect, your failure-to-pay penalty is one-quarter of one percent every month or portion of a month.
The failure-to-file penalty kicks in if you do not file your tax return and you owe tax. This penalty can be up to 25 percent of the back taxes. The IRS assesses a five percent penalty every month or portion of a month that your return is late, up to 25 percent. There is a minimum penalty for late filing if your return is over 60 days overdue. The penalty can be 100 percent of the tax owed or a flat $435 (in 2020) penalty, whichever amount is less.
The earlier you communicate with the IRS, the better.
How Payment Arrangements on Back Taxes Work
Many people do not respond to notice and collection letters from the IRS because they do not have enough money to pay the tax bill in full. You do not have to pay back taxes in one lump sum. The IRS will work with you to set up a payment schedule.
The IRS offers three options to help you pay your back taxes:
Offer in compromise. If you qualify, you might settle your back taxes for less than you owe. The application fee is $205 (in 2020), But you might avoid that if you submit a Doubt as to Liability waiver or qualify for the low-income fee option. If paying the full amount that you owe would create a financial hardship, or you cannot afford to pay the total amount, the IRS might approve an offer in compromise.
The bottom line is that if the IRS determines they would not expect to collect more than your offer within a reasonable time, based on your situation, they are likely to accept your offer in compromise. The IRS will evaluate your income, expenses, ability to pay, and asset equity. You can pay off the negotiated amount by making payments.
Payment plan. If you agree to pay the full amount owed and you meet the eligibility requirements of the Individual Payment Plan or Business Payment Plan, you can apply for a monthly payment plan. You will need to sign an installment agreement. If you apply online, you can get immediate notification of whether the IRS approved your payment plan. The payment plan setup fees for individuals or businesses can be $0, $31, $43, or $149, depending on your situation.
Temporarily delay collection. If the IRS decides that, because of your circumstances, you cannot pay any of your back taxes, they might temporarily suspend collection and report your account as currently not collectible. When your financial situation improves, the IRS will proceed with collection efforts. Interest and penalties continue to accrue on the back taxes until you pay the full amount owed. You must complete a Collection Information Statement and provide proof of your current financial status to the IRS.
Maryland tax lawyer, Steve Thienel, can handle your tax appeal and explore your other options for dealing with back taxes and aggressive collections efforts by the IRS.
