Tax Debts: Paying Back Uncle Sam
Written by Gloria Zhu   


What happens when I owe the government taxes?
  • The Internal Revenue Service uses many ways to collect money owed to the United States Government when it comes to back taxes. Here are a few of the events that occur:
    • You receive letters from the IRS computer
    • A Revenue Officer (RO) may leave a card on the door of your residence
    • A Revenue Officer (RO) may make an unannounced call at your place of business
    • The RO may have levied your bank account, savings account, or pay check
    • The RO also has the power to close down businesses and seize assets including a personal residence
    • The IRS may file a lien at the county court house.

Should I try handling my tax debt alone or hire a professional?

Although the answer to this question varies as to your particular situation, there is a general rule we can apply.
  • If you owe the IRS less than $10,000, you can resolve your tax debts on your own. If you decide to do this, here are some options you can consider:

Option 1: Currently Not Collectible Status
You are able to file a not collectible status, also known as, CNC or transaction code 530, if you are experiencing a serious hardship. It is recommended that you consult with a tax attorney, and then file form 433-F that will notify the IRS that you are not able to pay any bills. This means that the IRS will stop all collections, including liens and garnishments. Although you are not completely free of your debt, you will be saved from losing you property and other assets.

If you qualify, the IRS will continue to send you statements letting you how much you still owe and interest will continue to accrue. You will be required to send an updated financial statement every year for them the IRS to review. Your statute of limitations, the time limit for the creditor to file a lawsuit, lasts 10 years on IRS taxes due. If they are not collected within this period, your tax can no longer be collected. To learn more, click here.

Option 2: Installment Arrangements
Although the process is not quite easy, you can make payment arrangements with the IRS to make smaller monthly payments. You will need to fill out a form and mail it, or go to the IRS website and get the form. There will be a $45-$105 fee, depending on your situation, assessed to set up a new arrangement or to reinstate an unpaid balance arrangement.

The payments will come out of your bank account by automatic draft each month on the day you choose. The reason for this is because the IRS would rather receive their money delayed or in several installments rather than having people skip out on their obligations. If you’ve received a large tax bill and can’t afford to pay it all at once, this is a great way to get some relief.

Option 3: Offers in Compromise
If you cannot find any way for you to pay the large amount of money you owe to the IRS, you may be able to qualify for the offers in compromise program. The IRS has made some changes in the recent years, but it has made it much easier for the average person to request this without the help of a tax preparer.

The standard requirements for this are that you must be able to commit to either a lump sum (paying all together) or payments over a 24 month period. Some people may qualify to pay it over the rest of their lifetime.

If you meet the requirements for this program you can get out of paying some of the debt, but must be able to put at least 20% of the original debt down.

Option 4: Filing bankruptcy
Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. You can read more about it here. (link it to the bankruptcy article)
  • If you owe the IRS between $10,000-$25,000, you should consider hiring a tax professional.
     
  • If you owe the IRS over $25,000, you should definitely be working one-on-one with an experienced and qualified tax professional.


Finding a Tax Professional
Before you work with a tax professional, ask about their credentials. The IRS only recognizes a tax professional that is a Certified Public Accountant, Enrolled Agent, or tax attorney. CPAs and attorneys are limited to practicing in those states where they are licensed. Enrolled Agents can practice in any state. Also, keep in mind that you will also be paying for his or her services. These tax professionals usually charge an hourly wage or a flat rate for all services.

Tip: If it is an hourly rate, ensure that you are not paying for paperwork time by asking your professional if you can fill them out ahead of time and focus on fixing the problem at hand.

Ultimately, if you have a problem with being able to pay your debt, the best way is to deal with the IRS quickly and honestly without letting your IRS problems go unsolved.



 
Last Updated on Friday, 24 December 2010 06:28