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If you owe a tax debt to the IRS, no matter the amount, you should expect the IRS to take aggressive actions to collect your tax debt.
Should you have a tax debt, find out what your options are.
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The current tax season is winding down, millions of taxpayers will be looking at tax bills they can’t afford to pay but can’t afford to ignore either.
Should you be unable to pay what you owe, you need to file a tax return. Should you choose not to file, you’re immediately facing a failure-to-file penalty as well as interest, additional costs and potentially a tax lien or levy down the road.
In February, the IRS issued a new set of rules to help soften the blow for taxpayers who can’t afford to pay their back tax debt when owed. These new rules include the threshold at which the IRS files a tax lien, expanding the installment agreement program, as well as the offer in compromise programs to allow more taxpayers to qualify for an IRS settlement.
“I’ve made a whole set of changes to the Offer in Compromise (OIC) program since I’ve been here to try to increase the participation rate, increase the acceptance rate, because it’s good for the tax system,” Doug Shulman, the IRS Commissioner said.
“There are a variety of things, all aimed at increasing acceptance rates for an Offer in Compromise, making it a user-friendly thing to apply for,” Shulman said.
Taxpayers still face a host of consequences for not paying taxes when owed and need to understand the options available to address their tax debt.
What happens If You Ignore Tax Deadlines?
If a taxpayer does not file a tax return and pay the taxes owed when due, the IRS can take several steps, including:
• Failure to File Penalty - The taxpayer faces an IRS penalty of 5 percent of the tax due for every month or any fraction of a month that the return is overdue, capped at 25 percent. Additionally, failing to file a federal tax return is a misdemeanor and carries a maximum fine of $25,000 for individuals or a one-year prison term. Interest will also be added to the penalty.
• Substitute Tax Return (SFR) - The IRS can file a Substitute for Return for the taxpayer based on information it has from other sources. The substitute tax return will not include exemptions or expenses to which the taxpayer may be entitled. So, it may overstate the actual tax liability. The IRS processes a Substitute for Return (SFR) so that they may assess the tax and allow for an IRS Tax Lien and/or IRS Levy.
• IRS Levy and IRS Tax Liens - Should you owe the the IRS a tax liability, the IRS will start a collection process. This can include a tax levy (wages, paycheck, Social Security, etc.) or an IRS tax lien. With a tax levy, the IRS can seize your property – for example, your house, car, bank account or wages – to pay your taxes if you failed to make arrangements to settle your debt. A tax lien is a claim used as security for a tax debt and can have a direct impact on a taxpayer’s credit rating. If a tax liability remains unpaid after the IRS issues a notice and demand for payment, a tax lien is automatically filed to record a claim by the IRS to all property owned by the taxpayer.
Under the new IRS procedures, tax liens will not be filed until a taxpayer owes more than $10,000 in taxes (up from $5,000). Additionally, the new rules make it easier for a taxpayer to have a tax lien withdrawn from their record after paying their tax debt. However, they need to make a formal request to the IRS for the withdrawal.
You want to avoid having a tax lien. A tax lien is a costly and disruptive experience. Your credit rating will be affected. You can have difficulty buying or selling a home and it could even affect your ability to get a job. You may have a problem renting an apartment and you may have a problem obtaining an auto loan.
You Have Three Main Tax Debt Payment Options: Steps taxpayers can take to help avoid a tax lien include either finding a way to pay the taxes owed outright or working with the IRS to arrange a payment schedule and possibly agree to reduce the amount owed.
1. Borrow, liquidate assets or charge to pay the debt. Taxpayers who owe and can’t pay their entire tax bill when it’s due, but can pay the full amount within 120 days, can ask the IRS for a short-term administrative extension.
Taxpayers who need more time have just a few options: They can try to secure a bank loan, such as a home equity loan, cash out a retirement account or use their credit card.
While going into debt to pay off a debt may not seem the best option, the interest rate and fees assessed by a bank or credit card issuer may be lower than the interest and penalties assessed by the IRS. Credit card payments must be made electronically, through personal tax software, a paid tax preparer or through credit card service payment providers.
Severe penalties for withdrawing from a retirement account may be more substantial. However, taxpayers may also want to explore this option with their tax advisor if other resources are unavailable.
2. You can enter into an installment agreement with the IRS. Anyone can call up the IRS and enter into a very bad installment agreement. It does not take any skill or knowledge to say yes as the IRS dictates terms. There are many factors that go into what the IRS will the IRS will accept. If you don't know what the factors are, consult with a tax professional who has experience with the IRS collection division.
Under the new rules, the IRS also is allowing small businesses to enter into “streamlined”
3. IRS Settlement via the Offer in Compromise program - In some instances, the IRS may accept less than the full amount due. This typically occurs if the taxpayer can show that the full tax debt could never be collected or they have a dispute with the IRS as to how much is owed, but neither party wants to enter into a legal battle to resolve the issue.
Under the new rules issued in February, more people may be eligible to participate in the Offer in Compromise program. Taxpayers with incomes of up to $100,000 (up from $50,000) and who have a tax debt below $50,000 (up from $25,000) can now request an offer in compromise from the IRS.
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FLAT FEE TAX SERVICE guarantees to have an IRS Wage Levy / IRS Garnishment stopped and released in 1 day/24 hours. Stopping an IRS levy is only the 1st step in tax relief. See if you are eligible and qualified for an IRS Offer in Compromise.