Don’t avoid filing your tax return if you can’t pay the amount due. File and send in as much money as you can afford. You’ll save the failure-to-file-penalty and reduce interest charges.
Contact the IRS
Next, contact the IRS to discuss payment options. The IRS is willing to help taxpayers resolve tax debt. Submit any missing returns before you reach out to the IRS. Being current on your tax returns is a requirement for most IRS tax resolution options.
Keep in mind that the processes for tax payment programs may differ in your state. Below are the general steps the IRS requires to apply for a tax resolution plan.
Negotiate Your Tax Debt
The IRS will consider an Offer in Compromise to settle your tax debt for less than the full amount you owe if you can prove you are unable to pay the debt. To start the process, fill out the online Offer in Compromise Pre-Qualifier Form.
If you qualify, submit an Offer In Compromise application. The IRS will review your application and respond to your offer. If you need assistance, contact a tax resolution specialist to help you negotiate with the IRS.
Set Up an Installment Plan
Under an installment plan, you make equal monthly payments until the debt is paid. For tax debts under $50,000, you can apply for a streamline installment agreement without having to submit financial statements.
If your installment agreement will cover more than $50,000, fill out IRS Form 9465 and mail it in. The form instructions include the mailing address for your state. You may also need to provide detailed financial information on a Collection Information Statement, IRS Form 433-F.
Apply for Hardship Status
What if you don’t have the money to pay your taxes at all? When you suffer a hardship such as illness or loss of income, you may qualify for hardship status. Hardship status means the IRS agrees that your tax debt is currently not collectible (CNC). You must prove that paying the taxes would create an undue financial hardship.
CNC status does not eliminate your debt. However, attempts to collect the debt stop until your financial situation improves. To apply, complete IRS Forms 1147 and 433-F and follow the instructions to mail them to the IRS.
You can recover from an outstanding tax bill. Contact the IRS to discuss a payment plan or a negotiate a lower rate. Navigating tax laws can be tough to do on your own. Consider hiring a tax professional who can explain your options and help you make the best decision.
IRS Tax Debt = No Passport
When you owe back taxes, the Internal Revenue Service uses a number of methods to collect payments. These collection methods include adding penalties and interest to debt, filing tax liens, issuing levies, garnishing wages, and seizing property. As part of a December 2015 transportation bill, the IRS now has the ability to revoke passports of serious tax offenders.
If you owe more than $50,000 in tax-related debt, including penalties and interest, the IRS can revoke your passport at any time. This new provision allows the Department of Treasury and the IRS to authorize the State Department to take away U.S. passports for individuals with serious tax debt. The State Department now has the authorization to deny, revoke, or limit taxpayers’ use of a U.S. passport. In addition to this, the State is not supposed to issue new passports to any individual with serious tax debts. As the law states now, the State Department will act upon the new legislation when told by the IRS to do so.
Your passport can be revoked both when you are in the country and when you are traveling out of the country. For example, you could be on a trip to Europe and the government could revoke your passport not allowing you to return to the United States. It is important to note exceptions can be made for emergencies and humanitarian reasons. If you have already been working with the IRS to pay off your tax debt, the new passport-revoking provisions do not apply to you. Additionally, if you are under a signed installment agreement, you will still be able to travel.
Some people find the new bill to be controversial, as passports may be required for domestic travel beginning this year. After September 11th, 2001, the United States issued the Real ID Act, which was put into place to tighten access to federal facilities. Part of the Real ID Act created a national standard for state-issued IDs; however, four states, Louisiana, Minnesota, New Hampshire, and New York did not comply, potentially making their IDs no longer valid for domestic flights.
This means individuals from these states must use their passports to fly within the United States, which creates an issue if passports are revoked for tax debt issues.
Here’s What the IRS Can Seize From You
Your personal property is likely very important to you. That is why when the IRS threatens to take it, it’s imperative to take decisive action, and quickly. Waiting too long to fight for your valuables can result in jewelry and furniture being removed from your home, your vehicles being repossessed, and even your personal residence being put up for auction. Business owners can face losing their properties, locks being placed on the doors of the company to prevent access, business equipment being removed from the workplace, and even the loss of supplies and inventory to the IRS, essentially shutting down the business for good.
During an IRS asset seizure, a taxpayer can lose everything they’ve worked hard for. Here is how the IRS seizure process works and what the agency can take from you.
Before assets are taken from a person, the IRS will first decide to take them based on the value. The amount of money that will need to be invested into selling the property will be subtracted from the appraisal. Even minor items will need to go through an initial appraisal process before the agency determines whether it is appropriate to seize them in order to settle the debt. The assets will need to be able to at least pay a portion of the tax liability upon the IRS determining that all other options will not be able to satisfy the debt.
What The IRS Can Take
In general, if the IRS is considering taking seizure action against you, it may pursue any and all of your real and personal property that contains sufficient equity. Intangible property, such as goodwill or rights to property, can also be seized. From jewelry to stamp collections, furniture to boats, and vehicles to paintings, the IRS can take it all.
The IRS typically uses in their in-house Property Appraisals and Liquidation Specialists (PALS) group to handle auctions. Sometimes, the IRS will also hire an outside company in order to auction the items off to buyers in exchange for money to be applied against the outstanding IRS debt. During the auction, there is generally a minimum bid that will be accepted by the IRS. There are many legal steps that first must be done, and the IRS will need to abide by any and all statutes relevant to the auctioning of personal and real property. Until the auction takes place and the property is sold for a value deemed reasonable, the IRS will be the owner of any properties that were taken. All IRS-seized property and scheduled auctions can be found on the designated IRS seizure and sale website here.
After the Sale
For buyers of IRS auctions, several legal processes need to be followed. These will be found within the auction rules, which the general public may not be familiar with. Many times, buyers will have to contend with various types of liens and other encumbrances and claims on the purchased property. They also are responsible for the immediate removal and transport of the purchased property from the IRS storage site. For the IRS, as long as the minimum bid is reached and the appropriate paperwork is signed, the agency considers the auction a success.
Whenever a tax lien is filed, the public is notified of a taxpayer’s failure to pay debts. In some states, the IRS cannot seize certain property, such as a home. However, in many states, this is still a possibility. If any properties are sold at a value higher than what is owed to the IRS, any additional money will be paid back to the taxpayer. If the value is less than what is owed, the money will still be put towards the debt, reducing the amount owed. This is generally what happens with smaller seized items that are taken to relieve tax debts.
Stopping the IRS Seizure Process
While the IRS possesses the power to seize and sell assets, taxpayers are also empowered to prevent the IRS from taking such drastic action. Before the IRS escalates their enforcement efforts, there are numerous opportunities for a taxpayer to effectively steer their IRS case towards a favorable and affordable resolution. When faced with a difficult IRS problem and the threat of a potential asset seizure, it is absolutely essential to have someone in your corner who understands the process and can help.
IRS Tax Lien vs. IRS Tax Levy: What’s the difference?
Taxpayers are often confused about the difference between an IRS tax lien and an IRS tax levy. Both are a part of the collection process when a taxpayer owes money to the IRS, but there are some crucial differences. It’s important to understand the difference between a tax lien and a tax levy in order to protect your rights and your property. Here’s a look at tax liens and tax levies and what you need to know about each.
IRS Tax Lien:
A federal tax lien automatically arises when the IRS assesses a tax against a taxpayer and sends a bill, but the taxpayer neglects or refuses to pay it.
The IRS then files a Notice of Federal Tax Lien with the county recorder in the county where you live, own property, or conduct business. The lien does not have to name the property to which it attaches; it automatically encumbers all real estate and personal property in the county. This public document alerts creditors that the government has a legal right to your property, including real estate, financial assets, vehicles, and equipment. It also attaches to all future assets acquired during the duration of the lien.
If credit reporting agencies pick up on the lien, it will be included in your credit report, damaging your credit score, and affecting your ability to borrow money, buy a home, or rent an apartment. It could even impact your ability to get a job.
A lien does not take the taxpayer’s property or take away the taxpayer’s right to sell the property. But it does give the IRS first dibs on the sales proceeds. For example, the IRS files a federal tax lien in the county in which the taxpayer owns a residence. The residence is worth $200,000 and has a $100,000 mortgage on the property. The taxpayer has a right to sell the home, but the $100,000 proceeds from the sale ($200,000 sales price less the $100,000 mortgage) will first go to the IRS to be applied against the tax debt before the taxpayer receives any proceeds from the sale.
You can get rid of the lien by paying your debt in full, settling the debt, or waiting until the statute of limitation expires – in most cases, 10 years. Even if you work out a payment arrangement with the IRS, the IRS may still file a federal tax lien.
IRS Tax Levy:
An IRS tax levy is different from a lien. A lien protects the government’s interest in your property when you don’t pay a tax debt, but a levy actually takes the property to pay the tax debt. If you do not pay the amount due or make arrangements to settle your debt, the IRS can seize and sell any real estate and business and personal property that you own or have an interest in.
The IRS can levy wages, bank accounts, subcontractor pay, accounts receivable, retirement accounts, homes, cars, and business equipment. However, seizing the taxpayer’s primary residence is rare and the IRS must first get legal approval. As such, seizing a home is usually reserved for only the most egregious cases.
There are a few things that the IRS cannot levy. These exemptions include unemployment benefits, workers compensation, most household goods, and some tools of your trade. Taxpayers commonly assume that if a federal tax lien has not been filed, the IRS cannot seize wages or bank accounts. This is incorrect. The IRS must file a federal tax lien before taking real estate and other property, but they can levy wages, bank accounts, and accounts receivable even if a federal tax lien has not been filed.
IRS levies are not a matter of public record and do not affect your credit report. However, because levies involve seizing assets, they typically cause a lot more problems for taxpayers than liens.
Avoiding IRS penalties
Can’t pay your tax balance? Did you know you can avoid up to 25% in penalties? The penalty for not filing a tax return is 5% of the tax balance due, up to a maximum of 25%. That penalty can add up fast! So even if you can’t pay the taxes due, file your tax returns! The penalty for not paying your tax balance is only 1/2 of 1 percent of the unpaid balance for each month or partial month the taxes remain unpaid. That is substantially LESS than the failure to file penalty. So don’t put off filing your tax returns on time, even if you have to delay payment.
What To Do If You Are Audited by the IRS
Filing a tax return is a responsibility that all people need to follow to stay compliant with the IRS. While most people will be able to file their taxes and receive a tax return, those with more complex tax situations, or are simply a bit unlucky, could face an audit from the IRS.
If you receive notification that you are to be audited, there are several things that you should do to make the process easier and ensure you get through it without any penalty.
Confirm the Audit
Millions of people every year receive some form of notification from the IRS that is calling something into question. While most people may overreact and assume it requires a full-blown audit, there is a chance that they just need one piece of information to finalize their review. Before doing anything, you should carefully review the letter and confirm with the IRS whether or not you’re going through a full audit.
If it turns out you are to be audited, the next thing you need to do is gather and provide as much information as possible. You will need to collect all of your tax-related forms including your W-2 statements, bank account statements, mortgage account statements, and anything else related to income or any form of tax deduction. Having all of this organized and ready for the IRS will lead to a quicker review and determination.
Speak with Tax Professional
If you hired an accountant to prepare your taxes, or if you paid for an audit support service, you should reach out to them immediately. They will help you to gather the information you need and present it in a format that the IRS is seeking. They will also be able to answer any specific questions that the IRS may have, which can take a lot of the work off your shoulders.
Be Polite and Courteous
Going through an audit with the IRS is a stressful experience. Furthermore, it can be easy to feel defensive and angry towards the IRS agent. However, it would be a big mistake to be rude or not provide all the information they are seeking.
Instead, you should focus on being polite and courteous and give as much information as promptly as possible. That will keep you on good terms with IRS during the entire process and will increase your chances of receiving a satisfactory review.
Undergoing an audit can be stressful and challenging. However, there are several things that you can do after you get your notification of the review that will reduce your risk of penalty and make it a less stressful experience. You should contact your qualified tax professional to see what resources are available for you during an audit.