Uh oh! You’re behind on your taxes, and now the IRS is sending you notifications. Falling behind on your taxes is relatively common, but it’s not an impossible situation When you receive a letter from the IRS, it’s essential that you respond promptly—don’t let stress prevent you from taking the appropriate measures. While there are strict laws dictating what the IRS can and can’t do, it’s important to take action.
Notices
The first thing the IRS will do when you owe them money is notify you through the mail. Thanks to the IRS Restructuring and Reform Bill of 1998, the IRS is much better at communicating with taxpayers in addition to granting “due process” rights.
One of the easiest ways to get into trouble with the IRS is to ignore notices. Whether they be computer generated or snail mail, failing to respond to IRS notifications will only lead to further penalties and potential loss of assets.
Know Your Rights
The IRS is required to notify you that you are entitled to representation during the debt collection or auditing process. Having a tax professional present to make sure that the IRS statute of limitations is honored during your audit is always a smart move. It's ill-advised to go in alone, but you can become familiar with these limitations by reading them on the IRS website.
The IRS Makes Mistakes
If you’re confident that you haven’t made any mistakes on your filings, don’t be afraid to question the IRS. In many cases, the IRS is too understaffed to keep track of the exact amount that you owe, especially if you have been making regular payments. Don’t take the word of the IRS at face value blindly, and keep careful records of any exchanges you have with them.
Due Process
The IRS cannot seize your bank account, car, business, or wages without giving you multiple written notices and an opportunity to appeal. One of the reasons it’s so important that you respond to the IRS’s notifications is that it gives you the opportunity to challenge their allegations before they begin seizing your assets. Once the IRS has seized your wages and assets, it can be next to impossible to get them back. If necessary, you can take the IRS to court, preventing any form of collection until ruled by a judge.
Consequences
One of the great things about the United States democracy is that no one will be sent to jail for owing taxes. However, if you lie during an audit, intentionally deceive an IRS agent, or cheat on your taxes, you could face criminal charges and consequences.
What are my Options when I owe the IRS?
Fortunately, there a wide variety of things you can do when you owe the IRS money. If you can’t afford to pay, here are some of the possible options for resolution:
- Installment Agreement: When you owe a considerable amount of money to the IRS, they are typically willing to allow you to consolidate your debt and make installment payments. Generally, the IRS will expect you to pay your bill within three years.
- Hardship Suspension: If paying your taxes will cause extreme economic hardship in your current financial position, they may grant you temporary relief until you’re in a position to pay what you owe. While the IRS won’t send you any more notifications or seize your assets, your debt will continue to accrue interest.
- Offer in Compromise: If the IRS believes that seizing your assets will cost them more than an offer in compromise, they will agree to it. An offer in compromise essentially settles your debt for less than what you initially owed and is typically paired with some form of an installment plan. You can think of an offer in compromise as the IRS version of “Let's Make a Deal”.
- Bankruptcy: In almost every case, bankruptcy should be a last resort. Filing for Chapter 7 will set your credit score to zero and remain on your credit report for seven years. Chapter 13 will allow you wipe away some of your debt and make payments on the remainder. You should always consult a tax professional before filing for bankruptcy.
More often than not, the IRS is willing to work with you on your tax debt. They aren’t evil, fascist robots out to ruin your life—they’re ordinary people just trying to do their job like anyone else.
If you’re in debt with the IRS and you need help, don’t hesitate to contact a tax professional to resolve your situation as soon as possible.