Every year, countless Americans find themselves in debt to the IRS due to underreporting or underpaying their taxes, either by mistake or intentionally. The thought of owing money to the IRS can be daunting and stressful, especially when it leads to a lien or levy on your assets. However, you’re not alone. At Prep Tax Smart, we’re here to help you navigate the complexities of tax debt and find the best resolution for your situation.
What is Tax Debt?
Tax debt occurs when you fail to pay or file your taxes, make an error on your tax return, or when the IRS adjusts your taxes, resulting in you owing money. In 2017, approximately 858,000 American taxpayers had delinquent accounts. The good news is, the IRS provides various options for taxpayers to resolve their debt. These options range from filing or correcting a tax return to arrangements like penalty abatement, installment agreements, or offers in compromise.
Understanding the Basics of Tax Debt
Owing the government tax money can be overwhelming, but understanding the basics can make the process more manageable. There are several ways to find out how much you owe the IRS, including online, by phone, at an IRS office, or by mail. The IRS offers numerous options to help you pay your tax debt, including reducing the debt through filing or correcting an already filed tax return. If it becomes too much, don’t hesitate to seek help from a professional.
Statute of Limitations on Tax Debt
Income tax debt does have a statute of limitations for when the IRS can collect on the unpaid debt. The total time for the statute is 10 years from when the penalty was assessed – this is known as a Collection Statute Expiration Date (CSED). After this date, the IRS typically has to forgo the debt. However, the CSED can be extended through various means, such as entering into an installment agreement, submitting an offer in compromise, having property seized, or entering in a period of non-collectability.
IRS Penalties for Underpayment
If you didn’t pay your taxes, or if something went wrong with your return, you may have outstanding debt. There are two types of underpayment penalties. The first comes with the filing of your tax return because you did not prepay enough taxes through withholding or estimated tax payments. The second, and larger, type of underpayment penalty is due when you don’t pay your taxes by the due date of your tax return. This penalty starts at .5% of the unpaid taxes, and increases each month to no more than 25% of the taxes owed.
First-Time Abatement
If this is the first time you’ve owed the IRS money, you can request a first-time abatement (FTA). If you prove to the IRS this is the first time you have been in a non-payment status on taxes, you can request an abatement of tax-related penalties for one tax period. You must show you previously didn’t have to file a return, or you filed and paid your previous taxes and have a three-year history of no penalties.
Reasonable Cause for Penalty Abatement
There are many reasons to abate penalty, in addition to the first-time penalty abatement. Some examples include fire, casualty, or natural disaster, death, serious illness, or unavoidable absence, inability to get records, and erroneous IRS advice.
Settling Your Tax Debt
Four common “reasonable collection alternatives” are recognized by courts: payment in full, an installment agreement, an offer in compromise, and temporary delay of collection.
Paying in full is self-explanatory, while installment agreements and offers in compromise (OIC) are ways of paying down your tax debt. If you are currently on all your tax returns and your debt is manageable but you just need a little more time to pay it off, you can request an installment agreement. With this method, you can make payments each month until your debt has been satisfied. However, you will have to pay a fee to set up the plan, and you will also have to pay interest and a late penalty.
Negotiating Tax Debt with the IRS
The IRS aims to efficiently collect tax on behalf of the government, encourage voluntary compliance, and promote reasonable fairness and consistency. To that end, the IRS does allow certain taxpayers to negotiate their debt to mutually benefit the IRS’ collection goals and the taxpayer’s reasonable ability to pay. While the IRS will not traditionally forgive debt, they are willing to negotiate. Because of that fact, debt settlement and resolution remain important assets for taxpayers looking for much needed relief for their situation.
Offer in Compromise
An OIC represents an agreement between you and the IRS, and it means you can settle your debt for less than you originally owed, so long as you meet certain requirements. These include proving that paying your tax debt would create an economic hardship, having unusual expenses due to catastrophic issues, experiencing a substantial drop in income due to unforeseen circumstances, and having little or no assets, or your assets have little or no equity.
Innocent and Injured Spouse
You may be considered an innocent spouse if your spouse, or former spouse, made an error on your joint return that causes your tax liability to be understated. If you believe your spouse should be the only one responsible for paying all or part of the tax owed, you can apply for relief from these unpaid taxes by filing Form 8857, Request for Innocent Spouse Relief.
Like an innocent spouse, an injured spouse can request relief from some liability of the other spouse. The main difference is that while innocent spouse relief is for something on the jointly filed return, injured spouse relief is for a past-due debt the other spouse owes.
When You Can’t Pay the IRS
If you owe back taxes, are experiencing economic hardship, and would have trouble paying essential living expenses if you paid off your tax debt, the IRS may consider the debt “Currently Not Collectible.” This would essentially give you some time to pay the debt, as the IRS would stop trying to collect it. However, the debt still exists, meaning it will accrue penalties and interest. This measure also may not stop the IRS from placing a lien on your property.
Tax Liens and Levies
If you fail to settle your tax debt and pay the IRS what you owe, the IRS might file a Notice of Federal Tax Lien to protect its interests. A lien affects your current and future property, credit, and business assets. While it doesn’t represent an outright seizure of property or assets (like a levy does), having a lien against your property means if you sell any property or generate income from your assets, the IRS has rights to any money you might make.
Unlike a tax lien, which represents a claim on your property in the event you don’t pay your tax bill, a levy is the outright seizure of your property in order to satisfy your tax debt. The IRS can place a levy on any property you’ve got interest in – this can include your home, car, bank account, retirement funds, wages, and more.
Conclusion
Dealing with tax debt can be a complex and stressful process, but understanding your options and rights can make it more manageable. At Prep Tax Smart, we’re here to help you navigate these complexities and find the best resolution for your situation. Whether you’re dealing with a lien, a levy, or negotiating an offer in compromise, we’re committed to providing you with the guidance and support you need. Remember, you’re not alone in this journey. With the right help and a proactive approach, you can successfully manage and resolve your tax debt.
