There are many variables that determine the amount of tax you pay each year, such as whether you are salaried or self-employed, make substantial charitable donations or realize capital gains. In some cases, changes in these variables can result in a much larger tax bill than you anticipated. But all is not lost if the final number on your 1040 is larger than the number in your bank account. This article explores the IRS collection process as well as some of the alternatives available to those facing this dilemma.
The IRS Tax Billing Process
Once the IRS receives your return and the balance due is posted, your file is termed a "tax delinquency account" and is sent to the collections department. Collections will send you a Computer Paragraph-14 (CP-14) notice informing you of your balance due, plus any applicable interest and penalties. If you don't pay the balance within a month, expect to see CP-501 and 504, "reminder" and "urgent notices of balance due". Four to six months later, you will receive a final notice of "intent to levy".
It is highly unlikely that a real person will even look at your return until you are at least six months (or more likely a year) overdue in paying your taxes. If you owe less than $1,000, then no person is likely to see it at all. However, this entire process is often accelerated for those owing business or payroll taxes. You can extend this process by sending the IRS a written request for another 45 days for each notice that you receive. In some cases, responding to these notices in writing can even foul up the IRS system and stop further notices for as long as a year.
ACS: The Dreaded Collections Department
If you fail to pay your taxes during the automated notice phase, then your file is sent to the IRS Automated Collection System. This branch of the IRS has the power to collect the majority of unpaid taxes, require the submission of unfiled tax returns and levy taxpayer income and assets. The ACS branch attempts to contact delinquent taxpayers via phone and email, and if you answer one of its calls, the representative will read a script to you demanding payment.
Your account will stay with the ACS for up to 10 years, until the statute of limitations runs out on your tax debt. However, at some point your account may be assigned to a field officer. This happens when your case is credited with a sufficient number of points to warrant human intrusion. As usual, the point scoring system is top secret.
It should be noted here that the IRS has publicly admitted its own inefficiency as a bill collector. In fact, the current total balance of unpaid taxes is well above $300 billion! Although modernization and computerization of IRS files has made its bill collecting procedures faster and more efficient, the IRS is still woefully behind in its collection duties. This should provide some hope for those who are severely delinquent on their taxes. (To learn more, read IRS Asset Seizures: Could It Happen To You?)
- Request an Extension
This is probably the first step that you should take if your 1040 shows a balance due that is greater than the funds you have available. Submit IRS Form 4868 either electronically or by mail before the tax deadline in order to obtain a six-month extension. This will give you extra time to accumulate cash to pay off your balance. However, interest and penalties will accrue on the unpaid balance in the meantime. (For more information on filing an extension, see Get A Six-Month Tax Extension.)
If you have already filed your return and owe tax, you can submit IRS Form 9465 to request an installment agreement. This allows you to pay your tax in monthly installments over a set period of time, such as 36 months. (For more information on this and other strategies, see Top 9 Solutions To An Unexpected Tax Bill.)
- Deal With Revenue Officers
If you receive personal contact from a collections officer, there are several things you can do to delay collection action. One of the simplest tactics is to express doubt about how accurate the tax bill is. IRS officers are prohibited from moving forward in the collections process unless they know authoritatively that the numbers on the notices are correct. This can buy you an indeterminate amount of time, anywhere from perhaps a week to a few months if you're lucky.
If the officer won't give in, speak to a manager or contact the Taxpayer Advocate Service. Or, if you're really washed up financially and absolutely can't afford to pay a dime for the foreseeable future, you can ask the collector to remand your account to a currently uncollectible or significant hardship status. Request that the officer postpone all collection efforts for at least a year. Keep in mind that this may not be easy: You will almost certainly have to prove to the collector's satisfaction that you qualify for this break.
If a collector contacts you via phone, you can set up a 60-month payment plan as long as your tax balance is less than $25,000. But it's a good idea to find an excuse to get off the phone with the collector on the first call and then assemble all of your financial data so that you can call back to negotiate a payment. And if you get a collector who won't budge on payment terms, don't hesitate to politely end the conversation and call back to speak with someone else. Always remember that you can ask to speak with a supervisor as well.
If IRS officer start asking you probing questions about your assets, use an excuse to get off the phone as soon as possible. Whatever you do, never lie to the IRS, as this can land you in jail. It may also be wise to request that your file be sent to a local IRS office, as this reduces the odds that your wages or assets will be levied. Local revenue officers can also authorize lower monthly payments.
- Make an Offer in Compromise
If you have no means of paying your taxes and your circumstances do not look like they will improve anytime soon, an offer in compromise may be possible. This process allows you to settle your tax debt for possibly much less than the amount owed. The IRS typically accepts about 25% of all Offers in Compromise, although the final offer may be much different than what you originally requested.
Furthermore, the process for this procedure is quite involved. You must submit Form 656 for Offer in Compromise, as well as Forms 433-A and possibly 433-B. The latter forms give the IRS detailed information on your financial situation, thus allowing them to determine whether you qualify for the offer. You will also have to submit a mountain of other financial documentation, such as pay stubs, bank, investment and other financial statements, even the registration for your car.
Therefore it is wise to get a copy of the IRS Form 656 booklet before submitting an offer, which can tell you immediately whether you qualify to make an offer or not. Also be sure to try and negotiate an offer with any states that you owe taxes to at the same time as the IRS. If you don't, then you may not have any way to bargain with the states if the IRS accepts your offer.
- File for Bankruptcy
One failsafe method of halting all collection proceedings is by declaring bankruptcy. A Chapter 7 bankruptcy can erase your tax debt under certain conditions, while a Chapter 13 plan can get you an affordable payment when all else fails. Either type of bankruptcy brings an automatic stay on all collection proceedings from all creditors, including the IRS. Of course, bankruptcy is a serious step with major implications for your credit rating. This step should not be taken without careful thought and planning. Furthermore, bankruptcy can only cancel income taxes, and not payroll, sales or estate tax. (For an in-depth look at the consequences of filing for bankruptcy, please refer to What You Need To Know About Bankruptcy.)
Owing the IRS taxes can be a frightening proposition for many taxpayers. But knowing what to expect can greatly ease this dilemma, especially for those who may have a way to pay the tax in the future.
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