If you owe the IRS money, it’s important you take steps to resolve the issue sooner than later.
In this article, we’re taking a closer look at what to do if you owe the IRS.
What to Do if You Owe the IRS
If you have either realized that you probably owe the government a tax debt or have received a notice from the IRS regarding your due balance, you are most likely understandably worried and upset. Owing money to the US government is no small thing, and tackling this issue as soon as possible is in your best interest.
The last thing you want to do is bury your head in the sand. Unless some special circumstance has led you to fall off the IRS’ radar for years, it’s likely that they already have all the necessary information to figure out what you owe. Taking proper steps to meet them halfway can not only reduce your overall debt but can also help you avoid additional fees and penalties and bring you to a swifter resolution. Let’s walk through it one step at a time.
Here’s what to do if you owe the IRS.
Do Not Panic
The IRS regularly finds cases of people filing late, not filing at all, or failing to pay their taxes. Unless you are actively trying to defraud the government, the IRS will not pursue charges, whether civil or criminal. A simple mistake can lead to a due balance – as can severe financial distress, as has been abundantly clear during this time of crisis.
If you owe the IRS money and are worried about how you’re going to pay them on top of all your other expenses, know that the IRS is aware of the distress many taxpayers are facing, and offer a number of different ways to tackle a due balance depending on how much you owe, how long you’ve been owing, and what your options are for financing.
The first thing you should do is seek out professional help. A tax professional will be able to help you figure out your next steps and suggest the best course of action for dealing with the IRS without incurring initial or further collection efforts while minimizing your penalties and costs. Just as it’s in your best interest to get the IRS off your back as soon as possible, it’s in the IRS’ interest to collect what they can without violating your rights as a taxpayer and move on.
Continue to File Your Taxes
If you find that you owe taxes and aren’t sure how you’re going to pay them off, then you might feel compelled to just avoid filing this year. But if you have been filing up until now, then skipping a tax year will only likely lead to even heftier tax debt, as the IRS may file a substitute return for you, one that only takes basic information into account from reports gathered through your employer and/or other sources of taxpayer information (including your previous returns) and doesn’t try to take into account deductions of any sort.
Furthermore, failing to file a tax return and subsequently failing to file a request for an extension will incur a separate and additional failure-to-file penalty, on top of your failure-to-pay penalty, and the accumulating interest on your tax debt.
The IRS also requires that you are up-to-date with both your tax returns and your estimated tax payments (if you are eligible to make estimated tax payments) before you can submit a payment plan or request some other arrangement.
If you have missed several years’ worth of tax returns, then you should request those returns from your employer or the IRS, or work with a tax professional to write up your tax returns before tackling your tax liability.
Know Your Rights
The IRS is obligated to follow a certain set of guidelines for interacting with taxpayers. While the IRS’s Taxpayer Bill of Rights, created by the National Taxpayer Advocate, is not a law in and of itself, it has been included in the Internal Revenue Code, a comprehensive set of tax codes. The Taxpayer Bill of Rights is a ten-point document detailing the rights a US taxpayer has, including:
- Right to Be Informed
- Right to Quality Service
- Right to Pay No More than the Correct Amount of Tax
- Right to Challenge the IRS’s Position and Be Heard
- Right to Appeal an IRS Decision in an Independent Forum
- Right to Finality
- Right to Privacy
- Right to Confidentiality
- Right to Retain Representation
- Right to a Fair and Just Tax System
No matter how dire your situation may be, the IRS is obligated to treat you as per this bill of rights, and what it entails in detail. It may help you to go over each point with a tax professional, so you fully understand what you may or may not be entitled to, and what you should expect when dealing with IRS agents.
Consider Your Payment Options
The only viable way to eliminate debt with the IRS is to pay it off. The longer you wait, the more it grows – and it’s very unlikely that you can wait long enough for the statute of limitations on your debt to expire. It’s more likely that the IRS will begin to use escalating collection methods to coerce payment, including a federal tax lien, wage garnishment, and property levies.
Thankfully, the IRS is generally quite reasonable when it comes to dealing with taxpayer debt – especially when you go through a reputable tax firm.
Following the aftermath of the financial crisis of 2009, the IRS further relaxed its requirements for debt relief and payment through the Fresh Start Program and depending on the size of your debt and whether you have the means to pay it off within the next two years or so, you may even have the option of working out a reduced tax liability.
If you have the means to pay, your options are a short-term payment plan (paying off the debt in its entirety through a few lump sum payments within the next 120 days), or a long-term payment plan (more than 120 days, through monthly installments). Fees for setting up a payment plan differ depending on the kind of plan you are pursuing and whether you are setting it up online or via mail/in-person/over the phone.
IRS Tax Debt and Indigency
If you do not have the means to pay your debt without undue financial hardship, or simply cannot make payments at all at the moment, you may file for a currently not collectible status.
This status will stop the IRS from claiming a tax lien on your property or otherwise taking any collection action against you until your situation changes.
Alternatively, if you cannot pay off the entire debt within the next few years but still have the means to pay off some of it, you may be able to negotiate an Offer in Compromise.
These can be very difficult to successfully negotiate, as the IRS is reluctant to take less money when it could possibly collect the entire tax liability. But in cases where your reasonable collection potential doesn’t match up to your total tax debt, the IRS may agree to allow you to pay as much as you can over a set period and forgive the rest.
Before you decide anything, consult a professional. You may have other options depending on your situation. If you are hesitant to agree with the IRS’s findings on your tax account, or if you believe they have made a mistake, contact a professional about making an appeal. If you’re worried about being able to pay off your debt, a tax firm may be able to help you find the best path forward.