“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” Ben Franklin
As our forefather warned no matter how much you protest, there is no avoiding the inevitability of taxes. When you fail to file or pay your taxes, you can count on the fact that sooner or later, the IRS will come to collect. Let’s say you owe Mr Rocko, $5K because you thought it had to be your teams year but you were wrong. Does he immediately come to take out your knee caps? Of course not!(hopefully) He will ask nicely, send his goons to remind you of that asking and then come for your kneecaps, plus interest on your initial debt. This process is not totally dissimilar from the IRS.
The IRS Collections Office won’t hesitate to put a lien on your home, garnish your wages, or take similar actions to recoup their losses. It may take years, but there is a high likelihood that the IRS will collect. It’s best to avoid allowing your tax debt to get out of hand and take action before the IRS starts sending you notifications.
Let’s take a look at a few categories of people to examine this process further.
The Non-filers
The IRS currently has over 14 million accounts in their collections inventory of which 7 million, they estimate have not filed tax returns. They have now instituted a program to go after people who have not filed. Now if you are owed a refund the IRS gives you 3 years from your due date to claim it or it is forfeited. However if you owe money expect to pay a failure to file and failure to pay penalty plus interest on your tax liability.
Example:
You just filed your 2016 tax return and find that you owe $3K. You would owe a failure to file penalty of $675 AND a failure to pay penalty of $675 PLUS interest of $363. Your total payment is $4413 on a $3K bill. Sounds like a payday loan!
File but don’t pay
Let’s say you just recently filed your 2018 return and to your shock you owe that same $3K. When that return is filed it starts what’s called the “assessment” process which now states the IRS has 10 years to collect on that tax(there are a few exceptions that can extend this). Now let’s say you’re feeling dangerous and think you can wait it out. The IRS will send you an initial billing notice(CP501) generally with a penalty and interest. If you do not pay it, they will send a second bill with more penalties and interest tacked on. If you still do not pay after receiving your final bill they can and will initiate the collection process. Before going into that let’s look at your options if you can’t pay in full but want to pay.
Installment Agreement
This is basically a payment plan you are setting up with the IRS through filing form 9465. If you can’t pay in full within 120 days they will assess a set-up fee of $225 (as of 2019). If you agree to make your payments through direct debit, the fee is $107($31 online). If your income is below a certain threshold, you can pay the reduced fee of $43. You can apply by phone, mail, online or in person.
If you owe less than $10K they will generally guarantee your payment plan is approved as long as you claim to pay off your debt in 3 years. If it is more than $10K then your minimum payment will be your balance divided by 72.
Offer in Compromise
If you claim that you can’t pay your debt in full or in installments you can apply to settle your total debt for less than you owe. To be eligible the IRS must deem:
– Your tax debt may not be accurate.
– You have insufficient assets and income to pay the amount due.
– Because of your exceptional circumstances, paying the amount due would cause an economic hardship or would be unjust (Your and my unjust may be different from theirs lol)
Before the IRS will consider your offer, you must file all tax returns you are legally required to file, make all required estimated tax payments for the current year, and make all required federal tax deposits for the current quarter. Your offer wont be considered if you are in bankruptcy or generally if you are undergoing an audit.
Notice of Intent to Levy
If you do not set up an agreement to pay and have ignored your previous billing notices then the IRS will send you a Notice of intent to levy. The notice will reference a tax period for which you owe taxes. The IRS must send you a notice the first time, for each tax and period, it intends to collect by taking your property. The IRS typically cannot take your property unless it provides you notice in advance.
Under the law, the IRS must take the following steps at least 30 days before seizing any assets:
– Provide you a written notice of the intent to levy and explain your right to appeal
– Include an explanation of the reason for the levy, the seizure process, and your options.
– Deliver the notice personally or send it to your law known address via registered mail.
The IRS can take wages, bank and retirement accounts, property, SSI benefits among other things. There are multiple notices to levy that you can be sent so be sure to know your rights under the specific notice you receive.
If you owe more than $10K the IRS will file a notice of federal tax lien. They will notify your creditors that they are first in line for your debts and they have a legal right to your current and future property and income.
Currently Not Collectible status
Currently Not Collectible status (CNC) for short, is an economic hardship you demonstrate to the IRS. With this agreement, you provide a collection information statement to the IRS proving that if the IRS forced you to pay the taxes you owe, it would create a financial hardship.
The IRS determines your status on a case by case basis. If the IRS approves, then this will temporarily stop collections. Any IRS levy goes away but a lien may still be filed. The IRS will follow up several months later to see the financial situation has improved enough in order to start collections again. This status won’t solve your tax problem but will buy you some time.
Final Notice and Right to a Hearing
The IRS will send you this notice along with form 12153. This form is to request a Collection Due Process hearing about your tax situation. You have 30 days to request a hearing. If the Form 12153 is filed within 30 days requesting a CDP hearing, the case will be forwarded to Appeals. Appeals will contact the taxpayer with a letter confirming they have the case and requesting information to be sent. In advance the taxpayer should be preparing the Collection Information Statement (Forms 433) in advance of the hearing. Most hearings are done over the phone but can be requested in person. During this process a taxpayer can initiate an installment agreement, dispute the amount owed or seek CNC status.
Moral of the story ladies and gents, file your tax return, preferably on time, and have a plan an agreement to pay. Call us for more info or if you need any assistance!
Terrance Hutchins, CLU, CFP, RICP, EA|
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