There are several reasons why people have IRS debt. People who are self-employed often fail to set aside sufficient funds to pay taxes by the due date. Employed individuals fail to establish the proper number of dependents, resulting in insufficient tax deductions from their paycheck. People sell real estate and don't acknowledge their capital gains. Others file bankruptcy and don't realize they have to pay tax against debts which are written-off.
Regardless of the type of IRS debt you may have, it is always smart to work with a tax accountant. Depending on the circumstances and amount of IRS debt owed, the Internal Revenue Service is usually willing to work with tax payers to establish a payment plan or write-off a portion of outstanding taxes.
Ignoring IRS debt collection letters will only result in penalties, late fees, higher level of debt, and in some cases, jail time. Therefore, if you owe the U.S. government money, it is time to take action and stop procrastinating about clearing up tax debt.
If you aren't certain how much IRS debt is owed, the first step involves contacting the Internal Revenue Service. IRS taxpayer assistance call centers are open Monday through Friday from 7 a.m. to 10 p.m. Individual taxpayers can obtain assistance by calling 1-800-829-1040, while business owners can call 1-800-829-4933 for tax help.
Both individual and business taxpayers can establish online IRS payment plans by submitting Form 9465 Taxpayer Installment Agreement Request. This IRS debt payment plan is available to tax payers who owe $25,000 or less. Taxpayers can choose one of three tax payment options: pay in full, short term extension, or monthly payment plan.
In order to obtain approval for an IRS debt payment plan, taxpayers must file all tax returns which are due and be eligible for installment payments. Presently, the IRS charges a $105 user fee which is added to the amount of delinquent IRS tax debt. If taxpayers establish a direct deposit account, the user fee is reduced to $52.
It is important to understand the IRS assessed interest and penalties against back taxes, as well as against taxpayers who fail to submit a tax return. Individuals who do not file taxes will incur a failure-to-file penalty of 5-percent for each month the tax return is late, with a maximum penalty of 25-percent.
Taxpayers who file a tax return, but do not pay their tax bill will be assessed a failure-to-pay penalty of 1/2-percent for each month the IRS debt is not paid in full. This penalty is calculated from the original filing date until the back taxes are paid in full. If you owe $10,000 in delinquent taxes, the IRS will add $500 in failure-to-pay penalties each month. As you can see, this will quickly make the IRS debt burden substantially more difficult to repay.
The Internal Revenue Service also charges interest for underpayment of tax. Interest is assessed on unpaid IRS debt and calculated on a daily basis.
Taxpayers who fail to file annual tax returns and fail to pay can amass substantial penalties and interest. Therefore, it is crucial to take control of the situation immediately.
Taxpayers who owe $10,000 or more in IRS debt may qualify for the IRS Partial Payment Installment Agreement. This option generally requires assistance from a tax attorney. Taxpayers must file past due tax returns prior to requesting this special tax payment plan option. Once approved, tax payers submit monthly payments according to their IRS agreement. Once installment terms are fulfilled, the IRS forgives the remaining tax debt.
Taxpayers who can afford to pay a reasonable amount of IRS debt may qualify for Offer in Compromise. Using this tax relief option, the IRS can agree to accept less than the full amount owed in back taxes.
Offer in Compromise is used when the IRS believes there is little chance of ever collecting the full amount of IRS debt from the taxpayer. When this tax relief option is used, taxpayers agree to let the Internal Revenue Service retain future tax refunds which will be credited to the outstanding taxes. Additionally, taxpayers must submit monthly payments until the agreed upon amount is paid in full.
Taxpayers who lost their home to foreclosure may qualify for tax relief under the Mortgage Forgiveness Debt Relief Act of 2007. Debt reduced through mortgage refinancing of a principal residence or debt forgiven through foreclosure, may qualify.
Taxpayers who filed personal or business bankruptcy must adhere to tax codes outlined in IRS publication 908 Bankruptcy Tax Guide. Debt cancellation through bankruptcy is a complicated matter that is best handled by a Certified Public Accountant or tax attorney.
While IRS debt can be overwhelming to deal with, there are solutions available. Taxpayers who are proactive in their attempts to pay unpaid tax debts will have better success than those who choose to ignore the problem. Answers to all tax questions can be found at IRS.gov.
If you are having debt problems or want to learn how to regain control of personal finance, take time to browse our money management and IRS debt article library. Subscribe to our mailing list to receive notification when new articles are published.