The IRS may begin a collection operation to ensure that your tax debt is paid if you have been found guilty of tax evasion or tax avoidance. When you file your taxes but do not pay them in full, this process also begins.
The IRS will issue a bill to the person if they fail to pay the tax they owe. The collection process then gets going. The IRS will also mail the taxpayer Publication 594 and a Publication of Taxpayer Rights together with the bill. The options and rights taxpayers have while dealing with the IRS are described in these publications.
How Can I Tell Whether the IRS Has Begun to Collect?
The IRS will initially send you a bill informing you that you have an unpaid tax debt and detailing why. Any additional fines and interest accrued beyond the due date for your taxes will also be included in this statement. You can pay this invoice in full with a credit card, a check, or a money order made payable to the US Treasury.
What Will Occur if I Am Unable to Pay in Full?
Daily compounding interest will be charged on the remaining balance if you do not pay the whole amount. Additionally, a monthly late payment fee will be assessed to you. As a result, you ought to make an effort to pay as much of the debt as you can.
To help you pay the entire tax debt, it can be in your best interest to obtain a bank loan or a cash advance on your credit card. The interest rate levied by your bank or credit card may be less than what the IRS levies. This might also prevent your credit score from being ruined by tax debt.
You might be able to work out a monthly installment plan with the IRS if you can’t pay the tax debt in full upfront or get a loan to cover it. You might also be able to work out a deal with the IRS for an offer in compromise.
How Do I Meet the Requirements for a Compromise Offer?
You can come to an arrangement with the IRS known as an offer in compromise to prevent the collection of your tax debt and the IRS placing a tax lien on your property (OIC). An OIC is a written contract that resolves a taxpayer’s tax debt with the IRS. The arrangement results in a partial payment of the debt.
A taxpayer may not always be eligible for an offer in compromise. Taxpayers who can settle their tax arrears through an installment plan are typically not eligible for an OIC. The IRS typically accepts installment agreements from taxpayers who owe less than $10,000 in taxes.
The taxpayer has three years to pay down the remaining sum. Weekly, monthly, and annual minimum payments are not necessary.
A taxpayer must satisfy certain minimum standards to be eligible for an OIC. The taxpayer must:
- Have submitted all tax returns related to the debt; and
- Have paid all applicable current-year anticipated tax payments.
According to the IRS, estimated tax payments are taxes on income that are not subject to withholding. Income from self-employment, alimony payments, dividends, interest, and rental income are all types of income that are not subject to withholding.
Only taxpayers who have paid the necessary federal tax payments for the current quarter and are company owners with one or more workers are eligible for an OIC.
Unless the taxpayer proposes a sum greater than the “Reasonable Collection Potential,” the IRS will not accept an Offer in Compromise. The present liquidation value of a person’s assets multiplied by expected future income is the reasonable collection potential (RCP).
Future income is the amount that can be collected from your anticipated future revenue, less the cost of necessary living expenses. Let’s say someone makes $5,000 every month. The person deducts $4,000.00 for daily necessities from this sum. As a result, the person’s future income will be $1,000 per month.
When the necessary conditions have been satisfied, the taxpayer must show that their request for an Offer in Compromise is justified. The IRS acknowledges these three good reasons:
- Concern exists about a person’s tax liability. This indicates that the IRS and the taxpayer have a valid disagreement on the amount, if any, that is owed. Various factors might lead to disputes. For instance, when someone wants to deduct a certain amount from their salary, this can lead to a disagreement. There will be less income to tax as a result, which is a benefit. The person sincerely thinks that the deduction is permitted by the Internal Revenue Code, a specific section of tax law. The IRS holds a different perspective. A conflict exists if each side can support its claim with evidence.
- There is no question about the amount owing, but there is uncertainty regarding the IRS’s ability to recover the whole amount. Taxpayers will only be able to pay their tax burden if their income and assets are equal to their total tax liability. As a result, the IRS won’t be able to recover the entire debt.
- There is an “effective tax administration” circumstance. According to federal tax legislation, an effective tax administration exists when the tax is legitimately due and can be fully collected. However, the IRS will accept an OIC because demanding full payment would either put the taxpayer in a difficult financial situation or be unfair to them.
Living on a fixed income is an example of a financial hardship that would be considered an effective tax administration circumstance. The individual is disabled, and their home has been modified specifically to meet the handicap. The taxpayer would be unable to pay their monthly mortgage payments if they were obliged to pay the tax through an installment agreement.
A case where there is an “unfairness to the taxpayer” is when someone has a tax debt. The IRS mishandled the taxpayer’s tax return, which is why there is a debt. The person would not have racked up the debt if it weren’t for the IRS error. The IRS may accept an offer of compromise to correct the error.
Another “fairness” circumstance could lead to the IRS accepting a compromise offer.
Let’s say a taxpayer who needs help contacts the IRS and asks for guidance or instructions. To the best of their ability, the taxpayer complies with the recommendations or directives. However, it later turns out that the advice or directions were incorrect. The mistake has resulted in tax debt for the taxpayer, and the person would not have had the debt without the incorrect advice or instructions. The IRS might accept a compromise offer for the amount the person would have due if the mistake hadn’t occurred.
The taxpayer must provide evidence for the IRS to accept the offer in compromise. The records must specify when the wrong guidance or instructions were given. The name of the IRS agent who provided the taxpayer with the advice or instructions must be known by the taxpayer.
Can the IRS Seize My Belongings?
The IRS may place a tax lien on your property to collect on your tax debt. The IRS may also legally seize and sell your property to pay off your tax debt by serving you or your employer with a Notice of Levy. Your “property” in this context comprises your salary, bank accounts, Social Security benefits, and any real estate, automobiles, or boats you may own.
Is a Tax Attorney Necessary?
If the IRS has begun the collection procedure to recover your unpaid taxes, you should speak with a tax attorney at once. Although tax law is quite complex, a tax attorney can evaluate your debts, represent you in communications with the IRS, and present your case in court to defend your assets.