The U.S. government expects you to pay income taxes to the IRS each year. Most Americans have taxes withheld from their wages, which helps to avoid owing the IRS a large sum at the end of the year. However, self-employed individuals and independent contractors who do not have any (or enough) tax withheld may need to make estimated tax payments instead.
If your taxes are not fully paid when you file your tax return, the IRS will send you a bill for the amount owed. This bill is the beginning of the collection process.
The first IRS notice that you receive will explain the amount you owe, including any taxes, penalties, and interest charges. This notice will also demand full payment of your balance due.
IRS Penalties for Past Due Taxes
There are stiff penalties for not paying your taxes. With monthly late fees and interest charges, the amount you owe can grow exponentially in size, making it even more difficult to pay. The longer your taxes go unpaid, the bigger the consequences – leading all the way to asset seizure and even incarceration.
Here are some of the penalties and fees that apply to past due taxes:
• Interest is compounded daily and accumulates on the owed amount (the interest rate is equal to the Federal short-term rate, plus 3%)
• The late payment penalty is .05% of the owed amount and increases each month the taxes remain unpaid (up to a maximum of 25%)
• The combined penalty for both filing and paying late is 5% of the tax owed (if your return is over 60 days late, the penalty may be up to 100% of the tax owed)
However, if you can provide reasonable cause for not filing or paying on time, you may be able to avoid incurring the late filing/payment penalty.
IRS Collection Enforcement Actions
It is in your best interest to contact the IRS and make arrangements to pay the tax due. If you cannot pay the amount in full, you can request a payment plan (see below). But if you ignore the issue and do nothing, the IRS will take actions to collect your taxes – such as filing a Notice of Federal Tax Lien, serving a Notice of Levy, offsetting your tax refund, or garnishing your wages.
A Federal tax lien is a claim against your property that is used to protect the government’s interest in your tax debt. If you fail to fully pay your tax balance within 10 days after the IRS sends you the first notice (of taxes owed and demand for payment), the IRS will file a ‘Notice of Federal Tax Lien’ in the public records. This notifies creditors that the IRS has a claim against all your property, including any property that you acquire after the lien arises.
A Federal tax levy is an outright seizure of property or assets. The IRS may levy your wages, bank accounts, or retirement income and apply the funds towards your tax liability. The IRS may also seize your house, car, or boat and sell your property to satisfy your tax debt. If you are owed any tax refunds in the future (Federal or State), the IRS may take these as well.
Furthermore, in some situations, the IRS may decide to launch a criminal investigation or file charges for tax evasion.
Tax Payment Arrangements (If You Cannot Pay in Full)
If you cannot fully pay your tax due, you should still respond to the IRS notice in a timely manner. Pay as much as you can now and explore your other options. If you’re unable to alleviate the debt with a loan or credit card(s), you will need to consider the IRS’ payment arrangements – including an installment agreement, an offer in compromise, or a temporary delay of collection.
An installment agreement allows you to resolve your tax debt by making monthly payments over a period of time, generally up to 72 months. Individuals owing $50,000 or less (and businesses owing $25,000 or less) can apply for an Online Payment Agreement. Otherwise, you must make the request by filing Form 9465 (Installment Agreement Request) and a Collection Information Statement (Form 433-A, Form 433-B, or Form 433-F).
An offer in compromise (OIC) is a settlement offer that you make to the IRS for less than the actual amount owed. Basically, you offer to pay a portion of your taxes now and the IRS agrees to forgive the remaining debt. There are strict eligibility requirements and you must be able to demonstrate that paying the taxes in full will cause you “extraordinary hardship.” If you are able to pay your taxes through an installment agreement, you will not qualify for an offer in compromise.
In some cases, you can request a temporary delay of collection from the IRS. If the IRS determines that you cannot pay any of your tax owed, they may label your account as ‘currently not collectible’ and delay tax collection until your financial situation improves. However, this does not reduce your tax debt in any sense.
NOTE: If you a member of the U.S. Armed Forces, you may be allowed to defer your payment. For more information, see IRS Publication 3 (Armed Forces’ Tax Guide).
Your Rights as a Taxpayer
It is important to understand that you have rights and protections when it comes to the tax collection process. The ‘Taxpayer Bill of Rights’ contains 10 major provisions – including the right to be informed, the right to pay no more than the correct amount of tax, the right to challenge the IRS’ position and be heard, the right to appeal an IRS decision in an independent forum, and the right to retain representation.
If you want to discuss your payment options, you can contact the IRS at 1-800-829-1040 or call the phone number on your notice.
If you have any questions regarding accounting, domestic taxation, essential business accounting, international taxation, IRS representation, U.S. tax implications of Real Estate transactions or financial statements, please give us a call at +305-274-5811.