What to Do If You Get a Tax Bill From the IRS

If you owe federal taxes to the Internal Revenue Service (IRS) but didn't send payment with your tax return, you will receive an IRS notice demanding that you pay the balance due. This is true for both personal and business taxes.

The IRS will assess hefty penalties and fines on your unpaid tax debt. Ideally, you'll pay your bill in full immediately by check, credit card, money order, direct debit, or debit card. You may also pay via an electronic federal tax payment system if that's more convenient. You'll find more information on payment options at IRS.gov.

Here, we'll discuss your options for paying your back taxes and explain the consequences of carrying a past-due tax bill.

What If My IRS Bill Is a Mistake?

If you believe your past-due balance is incorrect, contact the IRS immediately. You'll find the appropriate phone number on your bill. Prepare a written explanation of why you believe the bill is incorrect.

Include copies of any supporting documents, including the following:

• Past income tax returns
• Tax year(s) are disputing
• Copy of the original IRS letter
• Copy of tax return in question
• Specific reasons for why the amount is wrong
• Receipts
• Past tax payments
• Any additional information that supports your dispute

Do not send originals unless the IRS specifically requests you to do so because you may never see these documents again.

Keep good records of all communications between yourself and the IRS agent handling your case. Save copies of all correspondence and other tax records.

If you handle the via telephone, document the following:

• Phone calls, including the date and time of each telephone call
• The name of the person you spoke with
• Relevant contact information
• The substance of the conversation

You may also want to speak to a local tax attorney who can help resolve the issue.

What to Do if You Can't Pay in Full

You have several options if you're unable to pay your tax bill in full. One possibility is to set up a short-term payment plan with the IRS. You'll pay interest on your total tax debt and the application fee for the installment agreement request.

It's important to note that until you pay the full amount of the tax due, the IRS will apply any future tax refunds to your tax liability. The same is true for any tax credits you may qualify for.

Another option is to submit an Offer in Compromise to the IRS. This is a formal request for the government to reduce your tax bill. Before submitting your official request, complete the “Offer in Compromise Pre-Qualifier Tool" online. This will give you a better idea of whether you'll qualify for a settlement. If the IRS rejects your offer, you'll have to pay the monthly tax penalty at a rate of .5 percent.

This amount increases until it reaches the maximum penalty of 25 percent. The IRS will also charge 3 percent (per year) interest on back taxes and penalties.

Many people take out loans at a lower interest rate to cover their tax debt. Even paying with a credit card may offer a better overall interest rate.

Finally, if your tax debt is older, the court may discharge it through a Chapter 7 bankruptcy. You must meet specific criteria for this to happen. A bankruptcy attorney can better educate you on this option.

What Happens if You Don't Pay Your Tax Debt?

Some people assume that the IRS will do nothing if they don't pay their taxes on time. After all, the IRS has its hands full with big corporations and wealthy taxpayers, right? Wrong. Within a month of your taxes being due, the IRS will likely start collection activity.

The penalties for not paying your taxes can be severe. Not only will you have to pay interest on your back taxes, but you'll also have to pay penalties.

The penalties start relatively small at approximately .05% of your total debt (per month). However, they can go as high as 25%.

The longer you wait to contact the government about paying your tax debt, the more you'll owe in late fees, penalties, and interest.

Some of the consequences of failing to pay your taxes include (but are not limited to) the following:

• Tax liens: The government can place a lien on your assets, including real and personal property.
• Levies: The IRS may place levies against your bank accounts, freezing your assets until you fully pay the debt.
• Wage garnishments: The government often attaches taxpayers' wages for past due tax bills. The amount they withhold will depend on how much you earn.
• Collection activity: The government will initiate collection activity within a few months of your due date. This includes dunning letters and phone calls demanding payment.
• Passport restrictions: One unique consequence of not paying taxes is restrictions on your passport. The government may suspend your passport or refuse to renew it until you pay in full.

It's worth noting that the interest rate on your past-due taxes increases from .05% to 1% once the government commences collection action.

What Happens After You Start Your Payment Plan?

You must make your scheduled payments once the IRS approves your payment plan. If you fall behind, the government will void your payment agreement and commence collection action. Even if you have made most of your payments on time, you must stick to the terms of your plan until you make full payment.

If you miss one or two payments, you can probably keep your payment plan intact. You must contact the IRS agent handling your case and explain why you are late. The agent will review your payment history and ask why you haven't made your payments on time.

If you're a low-income taxpayer, the government will likely give you an extension on your past-due payments. However, you may still have to pay payment penalties.

Get Legal Help with Your Tax Bill from the IRS

It's perfectly normal to panic when you get a letter from the IRS indicating that you owe past taxes. The last thing you want to do is ignore the letter. As time goes by without payment, the collection activity will increase.

In these situations, the best thing to do is to call a local tax attorney. They can help you negotiate an installment agreement or “Offer in Compromise" with the IRS. Once you know your payment options, you'll have a better idea of how best to proceed.