Information for Those in Debt With the IRS
The good news is that you had a banner year and earned far more than you expected. The bad news is you didn't set aside any of your windfall and now owe the Internal Revenue Service taxes that you can't pay. Don't panic. You won't be hauled off to debtors' prison or face garnishment if you address your debt with the IRS immediately. Those who ignore tax debt may face stiff penalties, wage garnishment or criminal charges.
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Initial Filing
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If you compute your income taxes and discover you owe more than you expected and can't meet your tax obligation, it's important to proceed and file your returns anyway. Include payment for the amount you can afford to pay when filing. This ensures that you won't be delinquent because you failed to file in addition to your tax debt, and partial payment helps reduce interest payments that accrue on tax debt. Before you file, contact the IRS directly by telephone at 1-800-829-1040, and inform the agency of your upcoming tax debt. You may be granted a short-term extension to pay.
Collection Process
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When you underpay your taxes, expect to receive a formal bill in the mail from the IRS. This bill is legal notification of your tax debt, and it begins the IRS' collection process. If possible, pay the full amount on the bill -- which includes the tax, monthly penalties and daily compounding interest -- to settle immediately. If you can't pay the full amount of your debt, contact the IRS and create a payment plan to address the debt in a scheduled, long-term manner.
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Tax Liens
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If you don't pay the full balance of your tax debt within 10 days of receiving your bill, the IRS places a federal tax lien on your property, which also applies toward property you acquire after receiving the tax debt. This lien prevents you from selling your property without first addressing you tax debt. Creditors may be notified of the lien, and your credit rating may be impacted by it. Once you pay off your debt to the IRS, the agency removes the lien from your property.
Offers in Compromise
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In cases where your tax debt is more than you can reasonably pay through the installment process, the IRS may consider an offer in compromise as a means to settle your debt. The offer must exceed the amount the IRS can reasonably expect to collect from you, including the value of your real estate, savings and other property, so offers in compromise are usually only granted when a taxpayer's tax debt exceeds his earnings and the value of his estate. You must pay a $150 fee when applying for an offer in compromise, and auditors weigh your offer against your potential to pay your debt. If the IRS grants the offer and you meet your obligation, your tax debt is considered paid.
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References
- Internal Revenue Service: What If I Can't Pay My Taxes?
- Internal Revenue Service: Topic 202 - Tax Payment Options
- Internal Revenue Service: Topic 201 - The Collection Process
- Internal Revenue Service: Topic 204 - Offers in Compromise
- "Syracuse Post-Standard"; IRS to End Release of Taxpayer Debt Information; August 2010
