When you owe back taxes, it can be a confusing situation.
See our video explanation below, then keep reading for more information:
Take these steps in determining your course of action:
1) Determine if the debt is actually owed
The IRS often will send assessments that are incorrect. They also will send suggested new balances to be added based on information that has been received. Often you have already included information they are adding in your return or the additional information they received regarding your income is incorrect. Make sure to respond to any letter appropriately that has been sent to you by the IRS. If they ask for additional information, get it to them by their request date, and send it by Certified Mail with Return Receipt.
If it is the result of an audit, it is almost always in your benefit to appeal. The IRS almost always will “cut a deal” at the appeals level, resulting in a lower balance for you. If you have an old audit balance that you think is incorrect, you may be able to file an amended return and re-open the examination. Be ready to have a proof for everything you claimed in the amended return.
Once you have determined you actually owe the debt, and there is no further disputing it, move on to the next step.
2) Find out if you can settle the debt through an Offer in Compromise
Some sites incorrectly list an Offer in Compromise as a last resort situation. If you qualify, it should be your first resort. Paying money into debt, which then later gets settled by an Offer in Compromise, is money thrown away.
If you are eligible for an Offer in Compromise, everything is settled for a lower amount based on your financial information. The IRS has its own calculator here that you can try. It is not always 100% right but is a good starting point. You can also consult with a tax attorney to see if you qualify. Most should be able to give you a rough estimate in a phone consultation.
Offer low. Many tax firms only send out offers for $1,000 and up. This is a mistake based on old industry myths. Try to get your offer in for $100, and work your way up from there. We get offers accepted for $100 frequently, and sometimes for less!
3) If you cannot get an Offer In Compromise, get a payment plan and pay it off fast. If you can pay it in full.
If you are stuck paying the IRS back, it’s better to pay sooner than later. The interest and penalties combined stack up high in a short period of time. They generally will give you a payment plan of 72 months if you owe less than $50,000, but pay it off sooner. If your payment plan is longer than 72 months that you have gotten into with the IRS already, consult a tax attorney as often you would qualify for some type of settlement the IRS is not disclosing to you.
The exception to this rule is the taxpayer who has assets that do not allow them to get an Offer but still has no available monthly income to pay the IRS. These taxpayers can get into Currently Not Collectible status (also known as CNC), which is like a $0 payment plan. The IRS generally has 10 years to collect on a debt with a few exceptions. Stay in CNC long enough and the debts will fall off the IRS systems, and you will not owe. Balances placed into CNC over $10,000 come with a lien being filed against you as well, so be warned. The lien affects your credit and sticks to your property, but does not take your wages or bank account funds.
If you have enough funds to pay it in full and do not have any investments that will make you a higher return than the IRS’ interest and penalty rates, then pay it off in full.
4) If you are stuck paying it off, request a penalty abatement.
Once you have paid off the tax in full, you can request a penalty abatement by writing the IRS directly to where you file. Explain the situation in detail of why you owed on that year, give good enough reasons, and they might take the penalty off.
First Year Owed tip: On the first year you owe for in a series of years (or if you only owe for one year), the IRS will give you a “first time penalty abatement based on prior compliance,” to use their own words. For example, you owe on 2007, 2008, and 2009. You have paid off 2007 and are now paying in 2008. If you have no tax penalties assessed for the prior three years, 2004, 2005, and 2006, the IRS will give you the first time abatement in 2007. The same scenario applies if you only owe on 2007 as well. You can get this first-time abatement in two ways. First, call the IRS at (800) 829-1040. When you get an agent and they take all your information, tell them the year and form for which you are calling. Then specifically ask “I would like to request a first-time penalty abatement on this tax year based on my prior compliance.” The agent will enter this into the computer, and it will be accepted or rejected. If rejected, the amount to refund is beyond the agent’s authority or you have prior assessed penalties which bar you from this type of abatement. If the amount of the refund is beyond the agent’s authority to grant over the phone, you must make your request in writing. Here is a sample first-time penalty abatement letter.
by Robert Kayvon, Esq.