The IRS collection process and the penalties that accompany it can be stressful and overwhelming. The IRS recently estimated that the number of taxpayers penalized for underpaying their estimated taxes has risen nearly 40% in just five years. In 2015, 10 million tax filers were penalized for either miscalculating what they owed and underpaying or for avoiding the situation by never filing at all.
When you’re faced with owing the IRS, the collection process and accompanying penalties can be daunting, but you can’t avoid it forever. It’s imperative to resolve any tax issues before the IRS takes extreme measures to collect your debt through enforced collection, such as levying bank accounts, garnishing wages, and possibly even seizing your assets.
The good news is that there are several resolution options available, depending on the specifics of your situation, such as the amount of your tax liability and whether you are experiencing financial hardship. However, to even qualify for a tax resolution option, you must be compliant and current with the filing of your required tax returns.
Here’s a guide to how these resolution options work.
During a tax audit or examination, the IRS allows a taxpayer to have an authorized representative. Audit representation, or audit defense, grants a legal or tax professional to stand in on your behalf during the audit. Typically, these professionals are CPAs, attorneys, and enrolled agents.
RELATED: What a Tax Audit Really Means
The audit representative will develop the best legal strategy to defend the taxpayer, and he or she will assist in gathering all the necessary documents requested by the IRS.
Currently Not Collectible
If you have no way to pay your debt, and there is no money for the IRS to collect, you can file for a “currently not collectible” status. Under this status, the IRS will not be able to collect any owed taxes if your wages barely cover your essential living costs, if you’re unemployed and have no wages to garnish, or if you have no assets worth levying.
If your account is deemed uncollectible, the IRS will postpone the collection process until your financial situation improves and a different form of tax resolution becomes feasible. This is not a recommended form of tax resolution, as interest and penalties will continue to build against you. That said, if your financial statements prove that your debt remains uncollectible for over ten years, the statute of limitations will expire, and the tax debt will become permanently uncollectible, meaning that no other form of tax resolution will be required.
If you can show the IRS that there is no feasible way to pay your full debt, they may be willing to accept an “Offer-in-Compromise” (OIC) to lower your tax bill. For this to happen, both you and the IRS must acknowledge that you cannot pay all your debt. Then, you would offer to pay the IRS the maximum amount you can afford to pay. If the IRS accepts, they will lower your tax debt to match the amount you can pay. Once you pay the amount you have agreed upon, the debt is considered paid in full. The IRS recommends using this as a last resort.
Criminal Tax Defense
The risk of facing a criminal investigation by yourself is significant. If the IRS Criminal Investigation Division is investigating you for suspicious tax fraud, it is crucial that you hire a tax defense professional to represent you.
A tax specialist will have the knowledge and experience to guide you through the investigation and tax resolution processing so that you can minimize the chance of getting charged with criminal offenses.
Innocent Spouse Relief
In some cases, you may be held responsible for tax debt that your spouse incurred when you filed jointly. If your spouse caused the tax problem and you were completely unaware of his or her actions, you can utilize the IRS Form 8857 to request “Innocent Spouse Relief’ and have the penalties and tax debt removed.
If you do have the ability to pay some of your debt, but not all of it once, the IRS may be willing to allow you to pay your debt off in monthly installments. Though you will most likely to have to pay penalties and interest, installment plans are an excellent option for helping you get out of debt and back on track.
It is crucial that you set up an installment plan before the IRS attempts to levy and seize your assets. They will usually accept your installment offer to encourage tax resolution. If you set a reasonable time frame for an installment plan after demonstrating your inability to pay your taxes in full and consistently make your payments on time, you can avoid a levy.
It may be in your best interest to seek the advice of a tax professional so that they can coordinate with the IRS to create a payment plan that works best for you.
IRS Tax Discharge
In some rare circumstances, delinquent taxes can be discharged through bankruptcy, but there are strict and specific rules for this.
According to The Journal of Accountancy, you may be eligible to discharge your debt through bankruptcy if:
• More than three years have elapsed since the tax return, and liabilities, including extensions, was due-this includes extensions.
• The tax return has been filed more than two years earlier than the bankruptcy petitions.
• At least 240 days have elapsed since the day of an IRS agreement.
• The liability was not due on Trust Fund Tax.
• The Tax was unsecured.
Penalty Abatement and Adjustment
For most debt cases, the penalty and interest portion of the debt is high. You may be able to get some of these penalties removed through penalty abatement or adjustment. Penalty abatement or adjustment can occur if there is a reasonable cause which can be but is not limited to:
• A death in the family
• An error caused by an IRS employee
• Mailing the tax return or payment on time but not the incorrect address or with the wrong amount of postage
• The destruction of records to a natural disaster or another catastrophe
Tax Prevention and Planning
The most straightforward way to deal with tax problems is to resolve them before they even begin. The best way to do this is to have a tax professional prepare your tax returns. This will help to eliminate errors and misstatements, and if an error does occur, the responsibility will weigh more heavily on their shoulders than it will on yours.
Also, if there is an instance of the IRS sending you an intimidating letter stating you owe them money or penalty fees several years after you’ve filed the tax return in question, your accountant will have all important documents on file to prove that you are in the right. They will step in and communicate directly to the IRS for you and resolve the situation in a way that would be difficult for you to do yourself.
While tax debt can be a great challenge to overcome, there are solutions. For your benefit, it is always better to be proactive when dealing with the IRS. Owing a heavy debt to the IRS can cause panic over the consequences you may have to face, but the solution to this anxiety is certainly not avoidance. Because if you choose to ignore the IRS, they may resort to extreme measures to collect. They may begin to garnish your wages, levy your bank accounts, or even seize your assets. No matter how overwhelmed you may feel, remember that you have the power to take hold of your future and put the debt behind you. The sooner you act, the sooner you can get back to living a life free of tax debt-related stress!