Tax law is a funny thing. For most people, all they know is that they have to settle up their taxes with Uncle Sam every April 15. But when they owe money to the IRS, they don’t know that the IRS will always contact you with a letter first, that there are many different ways to handle a tax problem, or that there are time limits on IRS collections.
When you owe the IRS and want to deal with them, it is important to know how the IRS operates, the common mistakes people make when trying to resolve their tax debt and how you can avoid making the same mistakes again.
So, here are the things you can expect from the IRS when you owe back taxes.
So what happens when you owe serious money?
The IRS begins sending a series of notices when you owe back taxes and file your returns. The tone of preliminary IRS notices is usually neutral – informing taxpayers about their tax debt and urging them to act. If the notices remain unanswered or if you fail to take any satisfactory efforts to resolve your back taxes, the IRS will move to more aggressive collection actions to receive payment. The IRS will start sending you Notices of Intent to Levy, which are warning letters demanding you to take action. The final letter will be an IRS Final Notice of Intent to Levy and 30 days following that, the IRS will begin enforcement actions such as bank levies and wage garnishments.
Many people who owe back taxes think that they can escape from IRS actions if they skip filing their tax returns. But unfortunately, the IRS will prepare a return on behalf of the taxpayer by using the information they have on file. This return, known as “Substitute Filed Return (SFR)”, is based off from various income information reports such as 1099 filings, W-2s, interest earned records and several others. If you fail to take action, even after the proposed assessment, the IRS collection process will kick off into full swing.
Common mistakes people make when they owe IRS taxes
They fail to identify or fix the root causes of their debt crisis. And without fixing it in the first place, these same people are further pushed into darker recesses of complicated IRS debt resolution policies.
They ignore IRS notices or fail to follow directions. Each IRS notice deals with a specific issue with specific instructions for you about what to do. Ignoring notices often produce disastrous results for the taxpayer that includes losing their valuable appeal rights and facing unwanted IRS collection activity.
They become vulnerable and desperate to fix their tax problems. And the IRS feed on desperation, as taxpayers will agree to any kind of unrealistic repayment plan to get their levied money back. Only later on, they realize the mistake of accepting their one-sided plan as it leaves the taxpayer with little or no disposable income.
The right way to deal with back taxes
Do whatever is necessary to fix the underlying cause of your debt first. Make sure you have set enough aside a portion of your revenue for taxes or for estimated tax payments and checking your withholdings are correct is well worth your time. Make sure the person you hire for representation can understand and fix the root cause of your problem so that it never happens again.
Never ignore a notice from the IRS. It’s probably fair to assume that no one wants to receive IRS letters in their mailbox (except when it is a refund check). But ignoring the letter does not make it go away! If you have a deep seated fear of IRS notices, get a friend to open it and find out what the letter says. It is best to resolve the matter immediately before the IRS engages more drastic measures!
Know your options. Review the information, find out what you are charged with, calculate your reasonable collection potential (RCP), find out your options to pay (better get some knowledge about various payment plans before calling the IRS), and then take appropriate action.
A tax problem may seem overwhelming, particularly when an individual is at risk of facing garnishments or property seizures. First, don’t panic; many of the tax issues can be resolved through normal channels. But if you feel too much to deal with by yourself, get a professional help to resolve your debt. A tax attorney can help you solve the initial debt problem and he/she will act quickly to negotiate a reasonable payment plan before the IRS takes any collection action.