Keep Calm! 10 Things to Remember When You Owe the IRS

Chad Silver

Chad Silver

Managing Partner of Silver Tax Group, author of the book "Stop the IRS". Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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The Internal Revenue Service (IRS) collected more than $3.4 trillion in taxes during the 2017 Fiscal Year. The department processed more than 245.4 million documents in that period.

Every year, the IRS issues tax refunds and sends notices to those who owe the government. Having a tax debt can give you sleepless nights especially when you don’t know what to do if you owe the IRS a lot of money.

Fortunately, the IRS gives options that ease the burden on people who have difficulty in paying off their debts. If you cooperate, the agency can extend the payment period or reduce the debt owed significantly.

Many citizens do not know that such choices exist. Others dread the IRS and are unaware of their rights and privileges.

When you receive a notification from the tax collector, do not panic. Read through the vital points we have discussed on what to do if you owe the IRS a lot of money. We have also included facts about the IRS that every taxpayer should know.

1. Pay Attention to IRS Notices

The IRS sends notices by certified mail or a computer-based system. The trouble that can befall you for ignoring them may be regrettable.

Whether it’s a collection letter or Notice of Intent to Levy, do not hesitate to respond. You cannot escape the IRS. Ignoring the agency will only put you in extra trouble.

Reach out to the IRS immediately if they contact you. If you cannot satisfy the debt, consult a tax attorney in your area for advice.

2. Don’t Underestimate the Power of the IRS

The IRS is one powerful agency of the federal government. It has a lot of control on how it conducts its operations. Depending on your compliance or defiance, your experience with the tax collector can be smooth or nasty.

The IRS appreciates prompt communication. They can review your tax obligation if you explain your situation.

Defaulting tax payment can have the IRS take one or more of the following actions.

  • Levy your bank account
  • File a tax lien against you
  • Close down your business
  • Garnish your wages
  • Seize and sell your property
  • Destroy your work and business relationships
  • Contact your banker, associates, neighbors, business partners, and so on regarding your tax liabilities
  • Devise a monthly installment plan that’s too high for you
  • Follow up with your third-party transferees
  • Assess you individually for corporate employment taxes

Before things get this ugly, contact the IRS and agree on the best method of settling your debt.

3. There Is No Limitation to Wage Garnishment

If the IRS decides to garnish your wages, there is no set percentage or amount that the agency should deduct from your paycheck. What exists is an amount exempted from garnishment.

In other words, no one regulates the amount that the IRS can take. Instead, what you remain with has a limit. Anything you earn beyond the exempt amount goes to the IRS.

Several parameters come into play when determining the amount exempt from garnishment. It depends on the filing status of your previous tax return, the frequency of your payments, and the exemptions claimed on your payroll.

The IRS can garnish 70% of an employee’s wages or even more. The main reason for taking such a severe measure is to compel the defaulter to contact the tax collector to resolve the matter.

4. Seek Representation When Meeting the IRS

Before going to the IRS, consult a tax expert. The professional will advise you on how to prepare for the interview and how to behave. You will also learn the tricks that the IRS officer can use to corner you.

The IRS puts the interests of the government first. For this reason, the IRS officer tends to drive the interview against you making the process quite intimidating.

The IRS publication of 2015 on the collection process gives you a right to representation. You should also receive a courteous and professional treatment from the interviewing officer. Failure to this, you can discontinue the interview and demand to talk to a supervisor.

The IRS will want you to clear the debt through whatever means. If you don’t have enough cash to pay the bill, the agency will want you to sell your property or get into a payment plan.

During the interview, you risk disclosing information that can have adverse effects on your collection case. Anything you say or write in the presence of an IRS agent can work against you. That is where experienced tax attorneys come in handy.

Instead of going through this tormenting moment, it’s advisable to seek the representation of a tax relief professional. A reliable tax firm will understand how best to present your case and the information to reveal or withhold.

5. You Can Challenge the IRS Claims

The IRS cannot levy your bank account, seize your property, or garnish your wages without issuing you a written notice. You also have the power to challenge the claims of the IRS if you see the need.

Usually, the IRS reaches out to you through the mail with a detailed bill of your debt. Overdue tax debts attract penalties and interest. Taking long before clearing them continues to bloat the outstanding debt.

The entire collection procedure comes to an end the moment you challenge the tax collector. If you take the IRS to court, the agency cannot collect anything from you until the court makes a verdict. Some people have managed to stop the IRS for years through court orders.

The IRS prefers to settle tax debt issues out of court. The agents are open to negotiations with people who are willing to commit to paying.

6. You Can Pay The IRS in Installments

Negotiating for a manageable payment plan may be what to do if you owe the IRS a lot of money. An installment agreement allows you to settle the outstanding debt with equal monthly portions. The installment period extends to a period that’s enough for you to pay out the debt.

As long as you adhere to the installment agreement, the IRS does not take any collection activities. However, the unpaid balance is still subject to penalties, and it continues to accrue interest. For this reason, the taxpayer pays more money over a more extended period than expected.

You can request for this collection method by filling out Form 9465, Installment Agreement Request. You can also call the automated collections service of the IRS.

You can accompany Form 9465 with a completed return that shows the taxes due. Else, you can submit the documents separately.

A one-time setup fee applies when the IRS approves the installment agreement. The agency can reduce the pay for low-income earners or for taxpayers looking to set up a direct debit installment agreement (DDIA).

It is critical to honor the installment on or before the due date every month. You must also file your tax return every year as expected.

7. The IRS Can Hold Your Debt Collection

There are situations where the taxpayer can face desperate financial hardships by paying the IRS debt. For instance, when the monthly income cannot meet an individual’s necessary monthly expenses like food, healthcare, transportation, and utilities.

In such circumstances, the taxpayer can ask the IRS to put the tax debt collection on hold. If the agency agrees, it can declare the person currently not collectible.

The status benefits the taxpayer in that the IRS does not require any payments from the person at the time. Furthermore, the agency does not levy the income or accounts of the individual.

The IRS reserves the right to withdraw the currently not collectible status when it feels that the taxpayer can manage to settle the debt. When such a time comes, the tax collector returns you to the collection plan with immediate effect.

One reason for the lift of the currently not collectible status is a positive change in the person’s financial condition. The IRS keeps a close look at your information to rate the level of your economic hardship. Penalties and interest on the outstanding balance continue to accumulate.

8. You Can Renegotiate Your Tax Debt

Under the offer in compromise program, the IRS can review your debt downwards. The tax collector looks at your cash and non-cash assets, disposable income per month, and future income.

The findings enable the IRS to project the possibility of ever collecting from you. On renegotiating the debt, the IRS and the taxpayer agree on an amount that the defaulter pays in 24 months.

This plan forfeits any balances beyond the agreed amount. Once you satisfy the prescribed terms, the IRS releases any liens filed on your property within 30 days.

Offer in compromise has some unique disadvantages. After acceptance, the taxpayer must adhere to some compliance requirements for five years.

Also, the individual loses any tax refunds for a certain period. For some people, these shortcomings are nothing compared to the relief they get after the elimination of a considerable debt.

If you think that an offer in compromise is the right option for you, apply for it by completing Form 656-B. It comes along with documentation for income earned, expenses paid, and liabilities on noncash assets.

There must be an indisputable proof that the applicant cannot settle the full arrears owed. The offer begins with paying the application fee together with the initial payment.

9. The IRS Can Make Errors (We’re all Human)

Being the tax collection agency of the federal government, the IRS deals with thousands of tax matters every day. Humans do most of the tasks in the offices just like in other typical organizations, and errors occur now and then.

An audit by the GAO (General Accounting Office) showed anomalies in the IRS performance. The report is evidence that information processing by the tax collector is not 100 percent accurate.

For this reason, it is crucial for you to keep track of the tax payments you make and what you owe. If the IRS notifies you about a debt you don’t recognize, you can present your records to help with reconciliation.

The opinion of the IRS is not always sacrosanct. However, remember that you should never ignore the notices from the IRS office even if you think they are wrongful. You can also get professional assistance from a tax office near you.

10. You Can’t Go to Prison If You Can’t Pay

Losing your nerve over a possible jail term is not what to do if you owe the IRS a lot of money. If you lack the money to pay all your taxes, you have not broken any law.

An honest error in your tax return does not land you in jail. One example is when a taxpayer gets confused while filling out the tax form and enters some details in the wrong fields.

The law treats most tax liability matters as civil cases, not criminal. If an audit unearths that you owe the IRS, the court places a civil judgment against you to collect the balance.

There are tax offenses, however, which are criminal. You get prosecuted and sentenced in criminal proceedings. The most widespread criminal charges regarding tax are tax fraud and tax evasion.

Tax fraud involves deceiving the IRS intentionally, like declaring the wrong number of children. Tax evasion, on the other hand, is applying illegal mechanisms to avoid paying tax.

Tax evasion can give you five years of imprisonment. Each time you fail to file a return can have you jailed for one year. Assisting someone to evade tax can warrant you three to five years in prison.

What to Do If You Owe the IRS a Lot of Money – Final Thoughts

Now you know what to do if you owe the IRS a lot of money. You may also have learned a few things you didn’t know about tax matters in the United States.

Mistakes that lead to tax debt are more forgivable than committing fraud or evasion. Whenever the IRS serves you with a notification, it is critical that you read it and take it seriously.

If you have issues that hinder you from meeting your tax obligations, it’s wise to discuss them with the IRS. The agency can give you more flexible options for dealing with your debt.

Consult a tax attorney firm for professional aid in solving your IRS debt issues.

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