4 Common Types of Tax Debt Help
If you find yourself in a bind with your tax situation, it’s
smart to understand the processes and options available to you in different
scenarios. Here are four common tax issues and how they impact your financial
obligations to the IRS.
IRS Installment Agreement
An installment agreement with the IRS is a payment plan that
lets you pay your owed taxes over an extended period of time. There’s also an
option for paying your taxes over a short-term period, which allows you to avoid
paying a user fee.
A long-term installment plan is anything that takes more
than 120 days to pay back. In order to setup the plan, you’ll need to pay a
fee, which ranges based on how you sign up and whether or not you qualify as
The fee is added to your tax bill, as are any penalties
you’ve accrued. Additionally, your balance will accrue interest until you pay
off your balance in full.
In order to qualify for a long-term installment agreement
with the IRS as an individual taxpayer, you must owe no more than $50,000. This
includes penalty and interest in addition to your tax liability.
For a short-term payment plan, you must owe less than
$100,000 in combined taxes, penalties, and interest in order to qualify.
Applying online is the least expensive option but you can
also apply by phone, mail, or in person. Whichever method you choose, you’ll
need to include the following information in order to process your application.
Name: Make sure
it’s listed exactly as it appears on your tax return
Email address: Must
Mailing address: Should
be the same address used on your tax return
Personal information: This includes your date of birth, filing status, and social security number
(or individual tax ID Number, if applicable).
Verification: You’ll need one of three things to confirm your identity with
the IRS. Your options are a financial account number, a mobile phone registered
in your name, or an activation code that you can get via postal mail. The last
option takes 5 to 10 business days to receive.
IRS Audit Process and Penalties
You can be audited by the IRS for a number of reasons,
including because of random selection, straying from statistical norms, or as
part of a related examination involving someone else.
If you are in fact selected for an audit, you’ll receive
notification from the IRS through the mail. You’ll then receive a request to
have your records removed either by mail or as part of an in-person interview.
They’ll tell you exactly what documents need to be provided, but here are some
- Canceled checks
- Legal papers
- Loan agreements
- Logs or diaries
- Medical and dental records
- Theft or loss documents
- Employment documents
- Schedule K-1
Typically, requests go back for three years of records,
although it can go up to six years in some cases. The timeframe of the audit
depends completely on the type of issues being looked at, how available all
involved parties are, and whether or not you agree with the results.
Common Reasons for Being Audited
Whether your tax errors were intentional or not, there are
several reasons why the IRS may choose to initiate an audit of your returns.
- Math errors
- Failure to report total
amount of income
- Reporting excessive losses
- Reporting too many
deductions, including donations and expenses
- Excessive rounding
Make sure you carefully review your tax return before you
submit it. Using a tax software or tax preparer can help avoid mistakes. But
it’s also important to be honest and keep records to substantiate your return.
Potential Audit Penalties
The potential for a penalty increases greatly when you’re audited. The exact penalty depends on what kind of decision is reached by the IRS during the audit process.
Here are some of the most common penalties resulting from an
audit. The exact amount or percentage depends on the specific details of your
case, but you can get a general idea of what you may incur.
inaccurate tax return can result in a penalty between 20% and 40% of the total
Civil Fraud: If
you’re found to have committed civil fraud, you’ll likely receive a penalty of
75% of the unpaid tax that was considered fraudulent.
Fraudulent Failure to
File: This is a much less common scenario that is linked to tax evasion.
The penalty is 15% per month of failing to file, totaling a 75% penalty after
Interest: On top
of receiving penalties, you can also earn interest on your penalties if you
haven’t paid by the due date.
Offer in Compromise
Some taxpayers may be able to settle their tax debt with the
IRS for a lesser amount that what they currently owe. The test for whether or
not you qualify largely depends on of paying your tax bill in full would create
a financial hardship in your life. Here are some of the factors the IRS
considers when determining of you qualify for an offer in compromise:
- Ability to pay
- Asset equity
The IRS urges that you consider other payment options before
sending them an offer in compromise. A tax lawyer or other professional may be
able to help you submit a strong offer. Typically, the IRS will accept the OIC
if they think that is realistically the most money they’ll be able to collect
from you within a reasonable time frame.
Clearly, that’s not an exact formula, so professional
assistance could be worth it in this scenario.
The process for submitting and offer in compromise is found
in booklet form. It includes several forms you need to fill out, plus a
non-refundable $186 application fee and a non-refundable initial payment.
You’ll need one initial payment for each individual and business tax debt you
Offers (and your corresponding initial payment) can either
be paid as a lump sum of cash or as a periodic payment. The fee and the payment
you submit with your offer in compromise well be applied to your tax liability,
so be sure to designate with year and specific debt you’d like it applied to.
For accepted offers, you must meet the offer terms,
including filing returns and making your payments. Once those terms are
satisfied, any existing federal tax liens will be released.
For rejected offers, you can appeal within 30 days.
In extreme cases of unpaid taxes, the IRS can levy your
wages directly through your employer in order to satisfy your debt. Unlike
other creditors, they don’t need to get a court judgment before implementing
wage garnishment. Typically, you can have as much as 15% of your paycheck
garnished by the IRS, though the exact amount depends on your standard
deduction and total number of dependents in your household.
Before this happens, however, you’ll receive alternative
payment options to try and avoid this extreme situation. You’ll also receive
plenty of advance warning from the IRS to help you make other arrangements or
prepare for the wage garnishment.
You can get the wage levy released in a few different
circumstances, which include:
- Paying your owed amount
- Collection period ending
before levy was issued
- Starting an installment
agreement that doesn’t include wage garnishment
- Undergoing an economic
hardship because of the levy
Not only does wage garnishment impact your finances, it
could also impact your job. The IRS works directly with your employer to take
out the wages before they even reach you in your paycheck, so your employer
knows exactly what’s going on.
While the Consumer Credit Protection Act states that an
employer can’t fire you because of one wage garnishment, there’s no rule
protecting you if you have two or more. This can be from the IRS or any other
court judgment. The more precarious your tax situation, the more likely you
could be to lose your job, especially if you don’t have a strong relationship
with your current employer.
No matter what you job situation may be, wage garnishment
can do lasting damage to your finances so do your best to work out another
solution with the IRS before getting to this point. If you can’t, consider
hiring a tax attorney to help you figure out the best way to move forward in
Frequently Asked Questions
Can IRS debt be forgiven?
In some instances, you can receive tax relief by having some of your tax debt forgiven. This process is known as an offer in compromise.
What do you do if you can’t afford your taxes?
The IRS recommends filing your tax returns by the deadline even if you can’t afford your payment. This helps you avoid being charged extra interest and penalties. Contact the IRS to see if you can arrange a short-term extension, an installment agreement, an offer in compromise, or a delay in collections.
What is the IRS Fresh Start program?
This program from the IRS helps you pay off your tax debt over a period of six years. It’s reserved for people who owe a large amount. The IRS determines your monthly payment based on your income and liquid assets you have available.
Can a tax attorney negotiate with the IRS?
Yes, a tax attorney can negotiate on your behalf. Typically, you need to grant them partial power of attorney, which authorizes them to provide these services. Having a lawyer serve as your tax representative can help protect you and make sure you’re navigating the situation in the most advantageous way possible.
When should you hire a tax lawyer?
Hiring a tax lawyer can help you in a number of serious situations. Common reasons include if you’re being audited by the IRS, if you’re negotiating with them, if you’ve received an IRS notice that you don’t fully understand, or if the IRS is pursuing criminal charges against you.
Contact a Tax Attorney Today
Ready to get help with your tax problems? Reach out to an IRS tax attorney today.
Call Now! (855) 466-4656
with our top pick Silver Tax Group