In general, as a taxpayer, you are responsible for knowing that:
- Filing an extension on your taxes gives you additional time to file your return, but not additional time to pay the amount of taxes due.
- Penalties and interest start accruing the day after the filing deadline passes and continue to accumulate each day that there is an outstanding balance of taxes due.
- If you ignore the IRS’ attempts at collection, you will face enforcement actions.
- The time limit on an installment payment agreement was extended under the Taxpayer First Act of 2019 – from 6 years to 7.
- Alternatives are limited if you are either not in compliance or do not maintain compliance after negotiation.
So, there are five key actions you should take when you owe the IRS:
- File your return by the deadline to limit penalties.
Two penalties can be applied, a failure to file penalty and a failure to pay penalty. So, even if you cannot pay the total amount you owe, you should file your return by the deadline, whether the original filing date or the extended deadline. Filing by the deadline will help you avoid the failure to file penalty.
Under the Taxpayer First Act of 2019, the maximum penalty for failure to file a tax return was increased to $330 or 100% of the tax due, whichever amount is less. It was further increased by the SECURE Act, which passed at the end of 2019, to $435 for returns due on or after 1/1/20.
The penalty for failure to pay may take one of three forms:
- Failure to pay the tax reported on the form
- Failure to pay tax not reported on the form, and
- Failure to pay estimated taxes
The maximum failure to pay penalty is 25% of the total amount due.
- Determine all of your funding sources.
If you owe taxes, you should determine all possible sources available to you to get the liability paid as quickly as possible. This is particularly critical because, in addition to the penalties, interest compounds daily and will accumulate on the total as long as the payment remains outstanding.
If you do not have sufficient savings to cover the amount you owe, consider using a credit card, obtaining a loan or payroll advance, drawing funds from a retirement plan, selling items of value, and other actions that will give you the funds to pay the amount due in full.
It is critical to remember that some funding sources are more costly than others. For example, if you choose to use a credit card or take a loan, you will have to pay interest on the credit card debt or loan amount.
- Develop an understanding of the IRS collection process and enforced collection actions.
In addition to the accumulation of interest on the amount due and any penalties that have been assessed, the IRS collection process will begin. This process has a 10-year statute of limitations and is made up of a series of actions intended to get you to make payments or alternate payment arrangements.
If you ignore the collection notices, there will be enforced collection actions which could include:
- Levy notices
- Summons to you or third parties
- Additional penalties
Levy notices allow the IRS to seize certain of your assets to settle your tax debt (i.e., your salary or wages through garnishment, your bank accounts, and/or other property of value). In addition, a summons may be issued to obtain information that would allow the IRS to prepare your unfiled tax returns or determine your ability to pay. If the debt involves unpaid employment taxes, both a failure to deposit penalty along with a trust fund recovery penalty may be assessed.
- Get to know your alternatives and how you can qualify for them.
After reviewing all of your funding sources, if you are not able to pay the amount that you owe in full, the main payment alternatives available to you include:
- Negotiating a payment plan or installment agreement
- Negotiating an offer in compromise
- Temporary placement in a currently not collectible status
A payment plan or installment agreement allows you to pay the amount you owe over an extended period every month. If you can pay the amount due within a short period of time (180 days or less), you will not be charged a set-up fee for your plan. However, if you need to pay over a more extended period, you will be assessed a set-up fee for your installment agreement.
An offer in compromise allows you to settle the tax liability for an amount less than the total amount owed. However, there are stringent criteria to qualify. For example, you are not eligible if you are in an open bankruptcy proceeding or not currently in compliance. To be considered in compliance, all required tax returns have been filed and processed, and all current payments (withholding and estimates) are up-to-date.
Currently, not collectible status is granted when there is compelling evidence that you cannot make payments against your tax debt without incurring significant financial hardship. It is considered a temporary status and subject to periodic review. If your situation changes, you may be required to start making payments.
- Seek additional relief, if applicable, and remain in compliance
The longer-term payment alternatives available to you through the IRS require that you are currently in compliance, as noted. In addition, to ensure that your resolution is not rescinded, you must remain in full compliance and adhere to all of the negotiated agreement terms.
Therefore, you must continue to have your withholding remitted, make estimated payments as required, and file all returns on a timely basis.
There are two remedies available that allow a spouse (or ex-spouse) to recoup their share of a joint refund that is applied to a past-due obligation of the other spouse. Injured spouse relief is generally granted to those still married, while innocent spouse relief may be given to those who are separated or divorced.
Finally, you should seek to abate any penalty that is assessed. While there is no way to seek abatement of interest, a reduction of penalties will reduce the amount of interest.