Many people become paralyzed with fear when they owe money to such an onerous creditor as the Internal Revenue Service. They cringe at the sight of that dreaded piece of mail – a notice from the IRS. The most important thing is to respond promptly. Ignoring the problem will only make it worse.
An IRS notice includes the amount of tax owed, plus any penalties and interest added from the date the tax was due. If you are unable to pay your balance in full, and fail to respond, the IRS will begin collection actions against you. This may include offsetting any refund to which you may be entitled, filing a notice of federal tax lien against your property, or serving a notice of levy of assets such as wages, bank accounts, Social Security benefits and retirement income. To prevent these drastic actions, you must communicate with the IRS promptly.
The first thing you should do is to confirm the tax assessment is in fact correct. If you believe it isn’t, you must contact the IRS within 60 days and speak with someone who can explain the charges. If you still believe the charges are incorrect, or if you are uncomfortable calling the IRS, you should contact an attorney or a tax professional.
Second, if you are able, you should remit some payment with the notice/bill in order to show good faith effort to comply. Because your balance is subject to interest and a monthly late payment penalty, it is in your best interest to pay the balance in full as quickly as possible. Penalties are also assessed for failure to file a tax return, so you should file immediately even if you cannot pay your balance in full.
If you are able to pay your full balance and simply need more time, you may request up to 120 days to pay in full. You are not obligated to pay a fee for this arrangement, although the interest continues to accrue. The IRS will encourage you to obtain a cash advance on your credit card or obtain a bank loan, but many people are unwilling or unable to do so, as the fees for doing so may be too high.
The most common solution to this daunting debt is to submit a request for an Installment Agreement. This is a monthly payment plan you can use to pay the debt, ward off collection efforts and return to a good night’s sleep. Again, interest continues to accrue until the debt is paid in full. In many cases, the IRS still files a tax lien.
To qualify, you must meet certain criteria. You must demonstrate current and future filing compliance – meaning all tax returns have been filed. In addition, you must begin making payments toward your current tax liability, the purpose of which is to show that this problem will not continue to recur and the issues which contributed to the problem have been resolved.
You must disclose your income, expenses, assets and liabilities. Based on the information provided, you can make an offer of the monthly payment you feel you can afford. The IRS will ultimately determine your monthly payments based on your disposable income, according to local standards. Frequently, the IRS calculation of the amount you can afford is higher than what you’re comfortable with. There is some room for negotiation, if you properly exercise your rights.
The IRS will respond to your request usually within 30 days, either to inform you whether your request has been approved or denied, or in some cases, whether more information is needed to make a decision.
Once the IRS approves an Installment Agreement, it is imperative that you comply with all the terms and not miss any payments or make late payments. If you default, the Installment Agreement may be voided and the IRS may immediately reinstate enforcement actions to collect.
Another option for taxpayers who are unable to pay is to request an Offer in Compromise (OIC). An OIC is an agreement between the taxpayer and the IRS that allows you to settle your outstanding tax liability by paying less than the full amount owed. Although, it should be noted that if the liabilities can be fully paid through an Installment Agreement or other means, the taxpayer will in most cases not be eligible for an OIC.
If you truly cannot afford to pay anything as a result of your financial hardship, the IRS may place you in a status known as “Currently Not Collectible.” This is a temporary hold on your account which permits you to not make any payments for the duration of the hardship. This status is reviewed annually and you have an obligation to inform the IRS promptly if there is a change in your financial circumstances. Interest continues to accrue, but no collection action will be enforced.
The tax rules and regulations are complex and change frequently. You should always file your tax return timely, even if you know you cannot pay the balance due in full. Knowing that payment arrangements can be made provides a significant relief for many taxpayers. If you are not comfortable representing yourself, you should hire an attorney or tax professional that practices in this area regularly and understands the intricacies of dealing with the IRS.
If you have questions or concerns about your IRS notices, deadline or penalties or interest, contact us.