When resolving your tax issues with the IRS, it is important to make sure that you have got all your ducks in a row. Tax return preparation is especially important, as the IRS does not accept attempts at tax debt resolution without first addressing delinquent returns and missing returns. Furthermore, professional tax preparation can help you reduce your tax liability – and seeking representation through a qualified CPA, EA, or tax attorney can even help you potentially reduce your total tax debt.
Why Is Tax Preparation Important for Tax Resolution?
Tax preparation is a service offered by countless organizations, businesses, and even the IRS itself. Taxes are complicated. There are hundreds of federal and state tax laws that the average person would never care to remember, and they are constantly changing. And even at the most basic level – organizing and filing your tax return as a wage earner or sole proprietor – there are ways you could be saving on your taxes that you might never realize on your own.
Free tax preparation services help you manage your taxes and file them before the deadline. But professional tax preparation services can go the extra mile by demonstrating ways you could be saving money on taxes in the long run. However, in the context of tax debt resolution, the role of tax preparation is crucial to getting back on the IRS’s good side. It isn’t enough to be willing to pay off your debts – before the IRS even agrees to a payment plan, it will require you to be up to date with your respective state and federal income tax returns.
If you fail to file a tax return – perhaps because things have gotten to a point where taxes were the least of your problems, or because you might not have thought that you were eligible for a return a year or two ago – the IRS will typically utilize its resources to create a basic substitute return in your name. This substitute return does not take into consideration itemized deductions or the standard deduction and won’t go through the effort to optimize your tax liability. In addition, the IRS will often file for you at the highest tax rate possible. Even if you file a basic return with the standard deduction, you will almost certainly be better off.
You will be saddled with an average tax liability based on previous returns, information returns gathered by assorted organizations such as banks, returns filed by your employer, as well as the tax returns of other taxpayers in your region, age group, career group, and so on. A substitute return does not replace the need for a return filed by you. While you wouldn’t be able to claim old tax refunds or tax credits you no longer apply for, the IRS would still require you to create and file your missing tax returns if you ever plan to enroll in a payment plan, and finally clear your tax debt.
What Is the Tax Resolution Process?
If you wish to resolve your tax debt with the IRS, your first step would be to assess your current tax situation. The IRS is required to send you multiple notices before taking any actions on your tax account. These notices will help you determine the original date of tax assessment (the day your tax debt was determined and relayed to you), as well as whether the IRS has already begun any collection actions against you (such as filing a Notice of Federal Tax Lien, or a Final Notice of Intent to Levy).
If you aren’t sure what your tax debt currently looks like, you can log into your secure tax account via the IRS website, either through your Social Security Number or an Identity Protection PIN, and assess your current due balance, including penalties and interest. Alternatively, you can contact the IRS directly via phone and inquire about your tax debt. The longer you wait, the more your tax debt will grow. Failure to pay on time leads to a 0.5% penalty on your debt every month, up to a maximum of 25%.
Interest on tax debts grows at a rate of 3% plus a variable quarterly rate. If you are also facing a failure to file penalty for late tax returns, your monthly rate jumps to 5% (0.5% plus an additional 4.5%). Address your tax debt as soon as possible by inquiring about your payment options. Depending on your financial situation, your history of payment plans with the IRS, and your total tax debt, you may have to fill out a Collection Information Statement in addition to getting current on all your late tax returns, up to the last six years.
Entering a Payment Plan
Payment plans with the IRS are relatively straightforward. If you qualify, you have the options of:
- Paying everything at once (no fees).
- Pay in multiple lump sums within 180 days (no fees).
- Paying in monthly installments over more than 180 days (usually up to 72 months) (variable setup fees).
For most taxpayers with growing tax debt, the most reasonable payment plan is a monthly installment agreement. If your tax debt is a total of $50,000 or less, you may be able to enter a streamlined installment agreement and agree to authorize automated withdrawals from your bank account via Direct Debit.
If you are not applying for automatic withdrawals or are facing a larger debt, you may need to fill out a Collection Information Statement, and If you previously defaulted on a payment plan, you may need to prove you can pay now via a Collection Information Statement (even if opting for automatic withdrawals). Another option you might consider is a payroll deduction installment agreement.
Rather than pull payments from your bank account, a PDIA pulls payments through wages withheld by your employer. In any case, filing for an installment agreement requires an installment agreement request form. The IRS will provide one for you if you contact them about a payment plan via phone or in-person, but it is faster and cheaper to organize a payment plan via the IRS website. However, this type of agreement has stringent qualifications. Contact a tax professional if you can not meet these qualifications.
Considering an Offer in Compromise
If you cannot pay your debt within a reasonable period of time, even via monthly installments, you may want to talk to a tax professional about seeking tax resolution through an offer in compromise. Even if you cannot pay your tax debt, you must continue to file your returns, and make any estimated tax payments you qualify for before you can consider an offer in compromise. Offers in compromise require a thorough investigation of your finances to determine eligibility.
Avoiding Liens and Levies
Tax resolution is vital to avoiding IRS collection actions, particularly federal tax liens and levies on your assets, properties, and wages. As a creditor, the IRS has the right to issue a lien (legal claim) or levy (physical claim) on your assets and properties if you fail to respond to any of their notices or fail to pay your tax debt.
Entering a payment plan can reduce the likelihood of a lien, halt a levy, and even release a lien prematurely if you fulfill the requirements of three consecutive payments in a Direct Debit Installment Agreement with no recent defaults or offenses. Depending on your situation, professional tax help may be essential to fulfilling your tax resolution goals.