April 15th has come and gone, and not everyone is rejoicing after receiving their interest free loan they gave the government (tax refund). Many of us saw some numbers in the “Amount You Owe” column and there's not much rejoicing about that.
If you're a business owner, it's pretty common to owe the IRS, in fact you should be putting money aside out of each sale/commission to pay it. I remember someone telling me that I should be excited when the amount I owe in taxes increases because that means my income is increasing as well; in theory I guess that makes sense but in reality, I don't think I'll ever jump for joy when giving away a chunk of my money. It's kind of like getting your first paycheck; you calculate how much your check is going to be, what you're going to do with it and then….you're introduced to FICA and taxes; ‘What the….?!'
Anyhoo, back on track. When you have an amount due the IRS wants their money right along with your tax filing docs. If you have it great; if you don't have it; at least pay something. I made the mistake of saying: “Well, I don't have all of it so, I'll just send it when I have it all at the same time.” HUGE MISTAKE. The IRS charges interest and penalties on unpaid balances, so you can at least reduce that amount by paying something on it; not paying anything increases the debt astronomically. The rest of the amount can be paid by setting up payment arrangements with the IRS via installment payments, an extension to pay it in full or a settlement offer via a partial payment plan or an offer in compromise. Now, don't do the dummy like I did and just start making payments and have to track down your checks; the IRS is slow in their communications and each department literally deals with a specific thing and nothing else; I got transferred around so many times it was ridiculous; but lesson learned.
One thing to keep in mind is that the IRS communicates via Forms only. I tried sending a personalized letter via regular mail when attempting to track down my checks and learned that employees are trained to respond to forms, not letters; there is literally a form for everything. You can either search for a form online at irs.gov or call them directly to set up everything (you will hold for quite some time): 1-800-829-1040. I cannot stress enough the importance of setting up voluntary payment arrangements, the last thing you want to do is end up in collections or have a revenue officer coming after you, or even worst letting it get to the point where you have a tax lien issued against you.
What do you do if you can't pay? Don't panic; but Do Plan. Sit down, write out your monthly income and expenses and decide what you're gonna cut out of your budget to pay off this debt; if that's not enough, decide what you're going to do to generate additional income to pay off this debt. Next, make the necessary adjustments to your exemptions and withholdings to ensure this won't happen again next year.
You should expect a bill to come from the IRS, you'll get about 3-4 of them before a set of Final Notices are sent out notifying you of their intent to levy and your right to a court hearing. Most of the collection efforts are generated electronically through the mail; I've only had a human contact me when I was getting audited (that's another topic all together). It's easy to discard the letters just like most people do with regular debt collection letters; but… the IRS is a debt collector for the government; there is no escape. DO NOT IGNORE THE LETTERS! You'll get a total of 6-8 of them, my advice is to contact them when you get the initial bill at the number listed, typically about 3 bills are sent out before the Final Notice ones. NOTE: If you owe more than $100k you won't even get the luxury of any collection letters, you'll go straight to the final notices.
When you call don't expect the person answering to be able to work any magic for you. They are call center representatives, their information is limited to what's on their screen and they don't have the authority to make special arrangements outside of accepting payment in full and setting up installment payments within a specific time frame. What they can do is point you in the right direction; let you know what form to complete and who to send it to and where to seek personal assistance at your local IRS office. And don't expect them to be pleasant; I probably got about 2 friendly reps out of 12+, but I guess that goes with the stereotypical call center mentality (I've worked in several so I can say this, ha ha).
If you ignore everything I just said and fail to respond to the bills or the Final Notice letters, expect to be notified of:
- a bank levy,
- a wage levy,
- a social security levy,
- a locked-in levy where they lock your exemptions/withholdings at a rate that gives them the most money (single & 0 typically);
- and/or a federal tax lien.
Scary, right?! Confession I ignored every letter I received and sat there and panicked my way right into a tax lien. Don't be like me; be proactive in your communication with them.
And puleez don't hire one of those “I'll settle your tax debt for pennies on the dollar” people. These offers are possible but it's not like the IRS is giving away these type of settlement deals like water (well, water isn't free anyway but you get the point). Do hire someone who can legitimately figure out how much you can afford to pay per month, or to settle overall; a realistic number that is indicative of your income, your assets, your expenses and the current amount in your bank/retirement accounts; yes the IRS considers all of this. Basically, they would rather set you up on an installment plan to get all of their money than to settle the account and get some of their money. And if the information you have provided indicates that you can pay them in full within a 5 year time frame; your settlement offer will be denied.
Settlements take a lot of time to be approved too. Mines took 7 months; I've heard of others being approved in less than 3 months, however I've also heard some taking as much as a year. Interest and penalty fees continue to accrue while your settlement offer is pending approval/denial.
Hope this info helps; my tax lien was over 10 years ago but I remember looking at that ‘Amount You Owe' column like WTH????!!!! It was my first time making over 6-figures and I had no idea they would come for my single, with no kids behind like that! And when I spoke to the rep on the phone her reply was: “Well what did you do with all the money anyway”. My reply: “You mean all the money I bust my behind making? What did I do with my money?” She didn't like me too much after that, LOL. Afterwards I learned to be much more pleasant and desperate. I went from ‘my money' to ‘have mercy on me please!' Ha!