Do You Owe the IRS? What to Do if You Cannot Pay Tax Debt

Throughout the pandemic, the Inside Income Service was pretty lenient with past-due tax payments, however now IRS assortment efforts are coming again in full drive.

The company is ramping up efforts to gather overdue taxes after many debt-collection actions had been paused throughout the COVID-19 disaster. In March 2020, the IRS briefly halted some debt assortment efforts and later expanded the pause in February 2022 to incorporate a suspension of collections letters, together with notices of property seizure.

The suspension of these letters and notices continues to be in place however might be coming to an finish earlier than the yr’s over, in accordance with IRS Taxpayer Advocate Erin Collins.

Whereas the dialed-back enforcement of debt collections was not less than partially supposed to offer taxpayer relief, the IRS additionally had a serious bandwidth problem. The company was beforehand coping with a backlog of as much as 24 million unprocessed tax returns final yr.

Then got here an $80 billion money infusion to the IRS from the Inflation Reduction Act. (Some funding has since been rescinded.) Now that the company has began receiving parts of this funding, which is ready to be dispersed over a 10-year interval, the IRS has been in a position to implement new expertise to hurry by way of the returns.

With extra funding and a cleared backlog, the IRS is primed to renew regular debt assortment efforts in earnest.

Advertisements by Cash. We could also be compensated in the event you click on this advert.Advert

Table of Contents

What’s the IRS debt assortment course of?

Collins underscores that, whereas some collections efforts stay paused, you continue to owe your steadiness to the IRS. And the longer you wait to pay, the extra penalties pile up. She warns towards mistaking the pause for a “false sense” that the IRS forgot about your tax debt.

“The IRS does bear in mind these excellent balances,” she warned on her weblog, “and so long as the steadiness goes unpaid, curiosity and relevant penalties proceed to accrue.”

Collins notes that in the event you owe back taxes, the IRS will first ship you a CP-14 discover, aka a balance-due letter, that requests fee inside 21 days.

Following that — and after the resumption of regular collections practices — the IRS might ship as much as three further letters reminding you of your steadiness due (CP-501, CP-503 and CP-504).

The ultimate discover, CP-504, warns that in the event you don’t pay your past-due steadiness instantly, the IRS can seize your property, revenue tax refunds, wages and financial institution accounts.

In instances with a excessive steadiness due, a bodily IRS income officer might also become involved. This summer time, the IRS said it ended unannounced, in-person visits from the IRS. However an officer should attain out to request an in-person go to, which might be at your property, enterprise or native IRS workplace.

(Notice: These officers have all the time been unarmed, and they won’t threaten you with arrest or demand fee by card or wire switch. Overview the IRS’s tax scams resources in the event you imagine the individual contacting you is an imposter.)

Advertisements by Cash. We could also be compensated in the event you click on this advert.Advert

What to do in the event you owe the IRS and may’t pay

For those who don’t pay your taxes by the due date, you might get hit with some nasty penalties — plus curiosity that compounds day by day. The failure to pay penalty is 0.5% of the unpaid tax steadiness for every month it stays unpaid, as much as a most of 25%. Extra penalties apply in the event you additionally failed to file your tax return.

The IRS is mostly prepared to work with you — and even scale back penalties — as long as you attain out to the company in a well timed method with an affordable clarification (and the problem wasn’t on account of “willful neglect” or fraud).

“Absolutely the worst factor taxpayers can do could be to disregard these steadiness due notices or another IRS letters and notices,” Collins beforehand wrote.

The longer you wait, the upper the penalties rack up. Finally, the IRS can seize your property — together with your automotive, boat or actual property — if you don’t comply.

For those who’re unable to make any funds towards your steadiness on account of monetary hardship, you could possibly briefly delay collections by being deemed “not collectible” by the IRS. “Being at the moment not collectible doesn’t imply the debt goes away,” the IRS website explains. “It means the IRS has decided you can not afford to pay the debt presently.”

To make your case, you’ll have to contact the IRS at 800-829-1040 or by calling the telephone quantity in your invoice or collections letter(s). Have your monetary data available.

Moreover, the IRS affords a number of different fee plans.

Quick-term fee plan

A free 180-day compensation plan is out there in the event you owe the IRS lower than $100,000 in mixed tax, penalties and curiosity. You’ll be able to apply on-line for one of these plan.

Lengthy-term fee plan

Establishing a long-term fee plan will seemingly value you between $31 and $130 relying in your fee technique. You’ll be able to apply on-line in the event you owe $50,000 or much less in mixed tax, penalties and curiosity. In case your tax invoice is greater than that, you’ll need to use manually utilizing form 9465. The sort of plan can also be referred to as an installment settlement.

Provide in compromise

The supply in compromise is an application to settle your tax debt for lower than you owe, primarily due to monetary hardship. The method is prolonged, and utility charges usually begin at $205 plus an preliminary fee of your tax invoice.

In case your fee plan or settlement request is rejected or in the event you disagree with different debt collections exercise you can even battle the collections course of with an enchantment, which can usually cease the IRS from amassing the debt till the enchantment is settled.

What are the implications of not paying the IRS?

Finally, not paying the IRS the taxes you owe is extremely consequential.

Along with the steep charges and penalties talked about above, the IRS can file a lien — a authorized declare — to virtually all your present and future property after you neglect or refuse to pay your taxes. That features your home, automotive or different property — as effectively your monetary accounts and plenty of forms of authorities advantages (together with Social Safety funds).

When the IRS recordsdata a lien aka a Discover of Federal Tax Lien, your debt turns into public, alerting your collectors that the federal government has a proper to your property. Technically, liens don’t routinely seem in your credit report. So your credit score might not change — however collectors can entry this data, and a lien will seemingly damage your probabilities when making use of for brand new credit score.

Earlier than the IRS seizes (aka levies) your property, it’ll first ship you a tax invoice and a number of other notices below normal collections procedures, and you should have a proper to a authorized listening to not less than 30 days beforehand.

In severe instances, an IRS income officer might become involved and request in-person conferences. The IRS may additionally start contacting neighbors, kinfolk, employers or banks about your scenario. If the debt and penalties exceed $51,000, the IRS can notify the U.S. State Division of your tax debt, and the division might not problem or renew — and should even revoke — your passport.

How one can pay the IRS after debt assortment

The easiest way to come up with the IRS and pay your debt is by following the directions on the official mail from the company.

Sometimes the letter(s) will checklist your tax legal responsibility, a due date and different details about organising different funds or disputing the quantity.

For those who aren’t in a position to pay the invoice in full, the IRS says it is best to pay as a lot as you possibly can first. In-person, on-line and phone fee choices by way of money, debit and bank card can be found. After you’ve paid as a lot as you possibly can, it is best to arrange a short- or long-term fee plan or a fee in compromise (as outlined above) to keep away from additional escalation of your debt.

Generally, the IRS assigns your case to a personal assortment company. Earlier than it does that, the IRS will provide you with a warning in writing of the company it assigned your account to in addition to providing you with a 10-digit code that you’ll want to confirm with the gathering company earlier than organising your tax funds. The gathering company should additionally ship a separate letter confirming the account switch.

The IRS usually solely makes use of third-party companies for older instances — or when the company merely lacks sources to maintain involved with you straight.