What you need to know about dealing with tax debt;
- You have real options if you can’t pay your taxes. The IRS offers extensions to pay, installment agreements (payment plans), and two alternatives for people in financial straits: currently not collectible status and offers in compromise. Installment agreements are the most common solution, making up more than 90% of collection arrangements between taxpayers and the IRS.
- Penalties and interest can add up. If you don’t pay your taxes, you could face a failure-to-pay penalty of up to 25% of the tax you owe, plus interest. If you set up an installment agreement with the IRS, you could cut your failure-to-pay penalty in half. Plus—if you qualify, you can ask for penalty abatement.
- You may be able to reduce your taxes and penalties. For the tax years you still owe, you may be able to reduce your tax and/or penalties. There are several ways to do this, including asking for audit or CP2000 reconsideration, filing an original or amended tax return, or asking for penalty abatement– all depending on your situation.
- Paying the taxes or getting a collection alternative is the only way to avoid more serious problems. If you don’t pay or make arrangements, the IRS can eventually issue tax liens, levies, wage garnishment, and passport restrictions.
- You can expect a series of collection notices. The IRS sends a series of computer-generated notices (called the IRS collection notice stream) that starts with a request to pay and can end with a levy and/or lien.
Steps to resolve your tax debt issue;
Get information from the IRS.
Get three things from the IRS:
1.) The balance you owe
2.) Your collection enforcement status and deadlines
3.) Your compliance status
It also helps to get your IRS account transcripts, which show tax and penalty assessments, balances you owe, and some account activity. But you’ll usually need to contact the IRS to get specific information about enforcement activity and deadlines. Also, if you’re not sure whether you’ve filed all your required tax returns in the past, you’ll need to ask the IRS.
See if you have enough time to avoid collection enforcement (liens, levies, etc.). If the IRS is going to act on your tax bill soon, and you must take more steps to get your collection agreement (like filing past-due returns or weighing your options to pay), you may want to request an extension to pay or a collection hold.
Contact the IRS directly to ask for a collection hold or an extension to pay. If you already have a levy or garnishment, you should ask the IRS for a levy release in exchange for a deadline to get into an agreement on the balances owed. If the IRS denies your extension or hold, consider appealing the decision or moving quickly to set up an IRS agreement and get your levy released.
Fix any immediate filing or payment issues. You can’t get a collection agreement without being in filing and payment compliance.
Filing compliance means that you’ve filed all required tax returns (for individual filers, that usually means the current and past six years of returns).Payment compliance means that you have enough withholding and/or estimated tax payments so that you won’t file and owe again for your next tax return.
Figure out your best option. You’ll need to consider your whole picture when deciding how to pay or get into an agreement for your tax debt. Look at your ability to pay, the amount you owe and how you can avoid collection enforcement.
Select and request your collection option.
You can quickly set up simple agreements like the extension to pay, streamlined installment agreement, and the full pay non-streamlined payment plan with few IRS forms. In many cases, you can set up an extension to pay or streamlined installment agreement online in less than 30 minutes.
Ability to pay agreements, such as the ability to pay installment agreement, currently not collectible status, and offer in compromise, are more complicated. You’ll need to supply the IRS with financial information (Collection Information Statements – Form 433 series) and other documents. You’ll probably interact with the IRS multiple times to answer questions and figure out final terms. Respond to the IRS quickly during this process to avoid collection enforcement (lien, levy).
Finalize terms of the agreement and appeal any disagreements. Look for an IRS notice confirming your agreement terms or review your IRS account transcripts. If you disagree with the terms of your agreement, collection enforcement actions, or a rejected OIC, you may need to appeal the IRS decision to get a second review of your circumstances and proposed solution terms.
Complete the terms of the agreement.
- If your agreement is an extension to pay, pay before the due date or set up another collection alternative.
- If the agreement is a payment plan, make the payments each month.
- If the agreement is an OIC, complete the terms of payment and stay in filing and payment compliance for the next five years.
With CNC status, you don’t have to do anything. If you have a levy in place, make sure the IRS released the levy if that was in the terms of your agreement.
Stay compliant and watch future notices. Be sure not to file and owe and not pay in the future. Any new unpaid balance will default on an existing installment agreement. Unpaid balances in the next five years will also default on any approved OIC. If you owe taxes, you will always get an annual notice from the IRS showing the payments you made and the rest of the balance you owe. You’ll need to address any other notices right away to avoid defaulting on your agreement and possible enforced collection.
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