The IRS has one job: collect taxes from American citizens, residents, and businesses. But it misses out on $400 billion in unpaid taxes each year.
On average, 84 percent of the money owed reaches the IRS’s coffers. So if April rolls around and you owe tax you can’t afford to pay, then you’re not alone.
In most cases, people owe taxes because they underreport their income. However, if you think underreporting will stop you from paying, you’re wrong. Not only will the IRS come for the taxes you owe, but the agency can garnish your wages if you don’t pay up.
Are you facing garnished wages because you owe a tax debt? Keep reading to find out what you can do to save your income from the IRS.
Don’t Let the IRS Garnish Your Wages
If you’re reading this and the IRS has notified you that wage garnishment is the next step but haven’t yet garnished your wages, don’t wait. You still have time to stop wage garnishment.
Preventing garnished wages is a far better option than trying to negotiate with the IRS once it starts.
If you have received a few letters requesting payment, respond to them by following one of these paths.
Negotiate with the IRS
The IRS provides ample time and routes for negotiation. Although it sounds like making a deal with a devil, it indeed is your best option.
If you cannot pay your entire tax bill, ask the IRS to reduce the amount due.
The manna from heaven described is known as an “offer in compromise.” An offer in compromise is an agreement between you and the IRS to reduce the total amount owed.
The IRS considers factors like your ability to pay, income, assets, and expenses in its decision.
Are you eligible for an offer in compromise? Check out the IRS’s free pre-qualifier tool right now.
Set Up a Payment Plan
Whether or not you receive an offer in compromise, your next best option is to negotiate a payment plan for installment payments.
By negotiating up front, you have more say in what you pay monthly. You can also choose how to pay by setting up a direct debit or paying online.
Both short-term (less than 120 days) and long-term (greater than 120 days) plans are available. You can also change your existing payment plan if your situation changes.
Keep in mind that you still pay interest and penalties on the tax owed. However, making payments lowers the burden by eliminating some of the accrued interest that comes with letting the bill sit.
Borrow Money to Pay Your Taxes
The IRS recommends borrowing money to pay your tax bill in one lump sum if possible.
Why would the IRS recommend taking on more debt to replace your tax debt? The reality is that IRS fees and penalties cost more than even the APR on a credit card or a personal loan.
If you can get the money elsewhere, do that first. You’ll save a significant amount of time and money compared to paying your tax bill over time – or not at all.
Don’t Ignore the IRS
Whatever you do, don’t ignore the IRS. You will pay your tax bill one way or another. Earlier negotiations will win you more points and offer you more options.
If you don’t respond to any requests for payment, the IRS will garnish your wages.
Keep in mind that the IRS is the only institution that doesn’t need a court order to take money from your paycheck. The IRS can also take more money from each check than any other creditor without asking permission. You might find that the IRS leaves you with only enough to scrape by – barely.
IRS Wage Garnishment Timeline
The IRS doesn’t move from collection to wage garnishment immediately. There are careful guidelines in place that dictate how they must notify you and when. You will never experience garnished wages without notification – at least not on behalf of the IRS.
Before taking a chunk of your wages, you’ll receive three notices:
- The notice of tax due and demand for payment
- The notice of the IRS’s intent to garnish your wages
- The notice of your right to a hearing
The right to a hearing letter (a Collection Due Process hearing LT11/ Letter 1058 letter) comes to you via certified mail – so you can’t claim you didn’t receive it. Once you receive it, you have 30 days to request and settle on a meeting date.
Once you get the final letter and fail to respond 15 days after the deadline, the IRS can start lopping off vast chunks of your paycheck.
The whole process from the first letter to launch of the wage levy may take between 11 to 25 weeks.
How Much of My Paycheck Can the IRS Take?
The IRS determines the amount to take from each paycheck based on your tax return.
It makes the determination based on your filing status, dependents, and the pay period using this chart.
What to Do After the IRS Garnishes Your Wages
Did you receive a paycheck that reflects only a fraction of your takehome pay? Then, the IRS began garnishing your wages.
Because you already had ample opportunity to work the IRS and received several notifications, your options are now limited.
Is there anything you can do? We’ll show you four options for stopping wage garnishment ranging from simple to nuclear.
If you don’t want the IRS to take money out of your paycheck, pay your tax bill.
The answer is that simple. If you have the cash or the opportunity to take out credit, pay up.
When the IRS garnishes your wages, they take more than back taxes. You also pay current tax plus the interest and fees associated with the amount you owe.
Garnishing your wages is expensive for the IRS, so it levies the highest penalties to those who force it down this route.
Demonstrate Financial Hardship
The IRS can take more out of your paycheck than any other creditor. You could be left with only enough money to pay necessary bills like your mortgage and car payments.
If the levy against your wages is causing you severe financial hardship, get in touch with the IRS and tell them.
You can call from 8 A.M. to 8 P.M. during the week, but be prepared to explain why quick action is so necessary.
Should you be successful, the IRS can lift the order to ease immediate economic hardship. Doing so, however, will not eliminate the debt. Instead, your wage garnishment will transform into a payment plan that you must pay or face wage garnishment again.
Remember, the IRS wants you to repay your tax, and the agents will work with you to make sure you do so. Be open and honest with the IRS to get the best result.
Wage garnishment applies to any job you (and your spouse if you file jointly) have in the United States.
Some people find they achieve temporary relief by quitting their current job and finding a new one.
Changing jobs doesn’t mean you’re in the clear. However, it takes the IRS a few weeks or months to instigate a new order for your new job.
However, the IRS will find you again. Moreover, the amount you owe after a few months of non-payment will grow substantially thanks to interest and fees accrued during that period.
File for Bankruptcy
Bankruptcy is a nuclear option, and you shouldn’t take it unless you’re ready to wipe your credit and assets in one fell swoop. You should not file bankruptcy for a debt you can pay off in a year or two.
One of the common misconceptions about bankruptcy is that it eliminates all your debt. Debt elimination companies hope you might believe that, but it isn’t entirely true.
You will still owe a tax debt after a Chapter 7 bankruptcy. You will have to repay in full after Chapter 13.
It is not impossible to eliminate some of your tax debt using bankruptcy. To do so, you need to meet all of these conditions:
- No evidence of fraud
- No evidence of tax evasion
- Debt is three years old
- All tax returns are filed on time
- IRS assessed the debt 240 days before filing bankruptcy
If you don’t meet each, then the court will keep your tax debt intact.
Additionally, even if your personal income tax debt disappears, any tax liens remain in place.
What About My Side Hustle?
Do you have a 1099 job or get paid cash under the table? Even that income may not be safe.
In addition to garnishing your W-2 wages, the IRS can also target your bank accounts or other types of income like Social Security. All the money goes to pay your taxes in addition to the interest and fees assessed since April 15 of the year you owed the tax.
The process is known as an IRS bank levy. Once again, the agency doesn’t need to go to a judge to enact it. Not only can the IRS put a hold on your bank accounts, but they can place liens on your property.
Can Anything Stop Wage Garnishment?
In short, nothing can stop wage garnishment once you reach that point.
There are temporary reliefs, such as claiming poverty, but these will only reduce the amount garnished or stop the payments for a little while. Keep in mind that reducing the amount you pay on the balance only results in higher amounts of interest due on the principal.
If you can get by with the wage garnishment, do it because it will save you money in the long term.
However, this changes as the debt ages. There’s a statute of limitations on back taxes that the IRS must follow.
The Statute of Limitations on Taxes
The IRS has ten years to collect taxes owed. If it has not obtained the money within a decade, then it writes off the debt.
For example, if you owe taxes from 2009, the IRS has until 2020 to collect. After that date, you are no longer legally obligated to pay.
However, you should not rely on the statute of limitations. Because the IRS has so much latitude to collect taxes through garnished wages, bank levies, property liens, and even your social security, it is more likely to collect what’s owed than not.
How to Prevent Back Taxes in the Future
If you are a W-2 employee, your best option is to overestimate how much you will owe the IRS each year. By offering a liberal estimate, your employer will take more from your paycheck, which means you are far less likely to owe taxes when April comes around.
Another option is to pay taxes quarterly rather than trying to settle with one lump sum in April. By paying quarterly, you’ll face smaller bills (but not a lower tax rate), and cash flow becomes less of an issue.
The quarterly option is particularly helpful for self-employed workers and small businesses.
It also applies to you if you have a side job or receive a 1099-C. Side hustles can leave people in the lurch with the IRS because they may serve as a form of extra cash, and you may forget to save a relevant portion of the income for taxes.
There’s Life After Garnished Wages
Is the IRS threatening to garnish your wages? You still have time to stop the process and negotiate your debt with the potential even to eliminate some of it. However, you must participate in the process for it to work.
Once garnished wages become your new reality, there are very few avenues for relief.
The IRS has ten years to collect what you owe, and there’s a good chance it will whether its through wage, bank, or property levies.
Are you struggling to negotiate with the IRS? No matter where you are in the process, you can benefit from professional advice. Get in touch today to learn how to resolve even the most painful tax problems.