When you owe money to the IRS, penalties and interest also start to increase the amount owed and can continue to add to what you owe until your tax debt is paid. While it might take a little while, sooner or later the IRS will take action to collect what is owed along with the penalties and interest due.
Collection action on the part of the IRS happens in the form of Notices of Intent To Lien and Notice of Intent To Levy. These notices are followed with the filing of liens and/or levies. A lien is a public notice that you owe taxes, which is filed in the public records. A levy is an instruction to a third party that instructs them to make payment to the IRS of money belonging or owed to you. The IRS can also seize property you own and sell it to collect a tax debt. It’s best to pay tax debts before the IRS takes collection action or to work out a payment arrangement with the IRS as soon as possible.
If you are unable to pay what you owe, there are several payment options which may be available to you:
- Extensions of time to pay: You can request more time to pay your taxes with a short-term extension (usually 60-120 days) or a financial hardship extension (usually 6-18 months).
- Installment agreements: You can set up a monthly payment plan with the IRS.
- “Currently not collectible” status: If you can prove to the IRS that you can’t pay anything, the IRS can place your account in temporary “currently not collectible” status.
- Offer in Compromise: In rare situations, you may be able to settle your debt for less than the total amount that you owe to the IRS.
The tax professionals at RMS Accounting can help you determine which options may apply in your case.
Basic Steps Needed To Deal With Outstanding Tax Liabilities*
- Determine the total amount of taxes due for all years and whether any tax returns remain unfiled.
- File any returns that are currently outstanding.
- Determine ability to pay taxes due, which includes making a list all assets, liabilities, monthly income and IRS allowable expenses.
- Determine best option(s) available based on your assets and ability to make payments.
- Contact the IRS to discuss your payment options, or file paperwork necessary to qualify for an appropriate payment option.
- If the IRS denies your request for an installment agreement, or an offer in compromise, you may want to consider filing an appeal of their determination.
* It is important to remember that collection matters can be extremely complex and are best handled by a tax professional who understands your rights as a taxpayer, along with the rules that govern how the IRS deals with collection matters. RMS Accounting has been helping clients solve tax problems for more than 30 years. Our tax professionals are Enrolled Agents, making them experts in resolving tax problems.
Timeline To Resolve This Issue
Depending on the type of collection alternative, the timeline could be short for a simple installment payment agreement, or as long as six months for a determination on an “offer in compromise”. In most cases the IRS should be willing to suspend collection action while paperwork is being processed to address your payment delinquency. This, however, can depend on how many notices have been sent previously and how long the IRS has been trying to collect.
Congress has also empowered the IRS to hire private collection firms to collect debts which the IRS is no longer actively pursuing. Before transferring a taxpayer account to a private collection agency, the IRS will send the taxpayer written notification that their account is being transferred to the private collection firm. This will include the name of the private collection firm to whom the account is being transferred. Our tax professionals recommend that taxpayers avoid dealing with these private collection firms. Instead, deal directly with the IRS when it comes to any matter of unpaid taxes and collections.
If should also be noted that tax collection is an area that has attracted a large amount of fraud with scammers calling on taxpayers and claiming outstanding debts which the taxpayer knows nothing about, demanding that payment be wired, or made with gift cards and threatening arrest. The IRS never demands that funds be wired or paid by gift card, and they will not threaten arrest or the use of police to enforce collection. If you receive a call from one of these scammers, the best action is to hang up on them. If you suspect that a debt may exist, contact the IRS directly at 800-829-1040.
Questions & Answers
How hard is it to make payment arrangements with the IRS?
If you qualify for a streamlined installment agreement, it is fairly easy.
To qualify you must:
- Owe the IRS $50,000 or less
- Be able to pay the entire amount owed in six years or less
- Have filed all required returns
- Ensure that your current year’s withholding or estimated tax payments cover your current taxes
What if you just need some extra time to be able to pay what you owe in full?
The IRS routinely grants short-term extensions of time to pay.
Does the IRS charge interest and penalties while you are in a payment arrangement?
For all payment arrangements, the IRS charges interest until the balance is paid in full. In addition, for most payment arrangements, the IRS charges penalties. Thus, it’s in your best interests to pay the IRS as soon as possible. You may be better off obtaining the funds from other sources to pay the IRS.