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The IRS Collection Process

What happens if you don't file your taxes or can't pay your full tax bill by the deadline for filing your federal income tax return? In most cases, if you don't pay your taxes or make payment arrangements with the Internal Revenue Service, your tax debt will go to collections. Also, late payment of your taxes will increase your tax bill. The IRS adds penalties and interest to the amount owed until you have paid your bill in full.

Once a taxpayer's case has gone to collection, the IRS has several options for getting the money from them, including seizing their property and garnishing their wages. The following offers an overview of the IRS collection process. Contact a tax attorney for legal advice on your tax situation and help negotiate with the IRS.

If You Didn't Pay Your Taxes On Time

Most taxpayers' taxes are due April 15 or the following business day if it falls on a weekend or holiday. If you don't pay your taxes by the due date, you may get a tax bill from the IRS explaining your balance due, that it demands payment in full, and any penalties and interest that it has added to your tax bill.

If you have the money available, you can pay the bill online, over the phone, or by sending a check or money order to the IRS. The IRS allows taxpayers to pay their bills online via direct deposit from their checking or savings account or using a credit card. Remember, for every day you don't pay your tax bill, the IRS will continue adding interest and penalties.

What Happens When the IRS Collects?

If you do not respond to your tax bill and don't contact the IRS to make payment arrangements, it will begin collections. The IRS can take several collection actions, including:

Notice of Tax Lien

tax lien is a legal claim on your property. Like a mechanic's lien or lender's lien, the government can establish an interest in your property as a creditor. Your property may include your home, vehicles, boats, and bank accounts. Any property you buy after the lien is issued is also subject to a government lien. When there is a lien on your property, you can't freely sell or transfer the property because the lien is a public record, and any potential buyers will be aware of the IRS's claim. The IRS won't release the lien until you pay your tax bill or work out an installment agreement.

Notice of Tax Levy

If you have not paid your tax bill after getting notice of a levy, the IRS may issue a Notice of Intent to Levy. With a levy, the IRS can seize your property, including vehicles, bank accounts, real estate, Social Security benefits, and retirement income. Even if you don't have a lot of property or money in any accounts, the IRS can still garnish your wages.

Refund Offset

If you owe money for a past tax year and are due a refund for the current tax year, the IRS could take the refund and future tax refunds to offset the past-due amount. If you have state income tax refunds coming, The IRS can levy them to pay down your tax debt.

Late Payment Penalties and Interest

Any taxes not paid by April 15 will begin accruing interest and penalty fees. The IRS assesses interest at the federal short-term rate plus 3%. The late-payment penalty is ½ of 1% for each month the bill remains due. If you never filed your tax return, there is an extra failure-to-file penalty of 5% of the monthly tax owed, up to 25%.

If you can't pay the balance in full, you should pay as much as possible. The unpaid balance is subject to interest, compounded daily, along with monthly late payment penalties. The more you can pay now, the less you will owe interest and penalties.

Sometimes, you might also consider making a credit card payment toward your taxes or getting a loan. Check the interest rate for your credit card or what the bank charges to see if it is lower than the combination of interest and penalties imposed by the Internal Revenue Code.

Taxpayer Rights

If the IRS has notified you that it plans to collect your unpaid tax liability and you think the tax bill is incorrect or unfair, you can appeal the IRS's decision. But if you plan to appeal, you must carefully read any notices you get from the IRS because there are strict time limits for appealing the agency's actions. Once the appeals deadline has passed, you can no longer challenge the IRS's actions.

Taxpayer Bill of Rights

The U.S. Tax Code includes the Taxpayer Bill of Rights, which lays out your rights when dealing with the IRS. Among other things, the bill of rights ensures taxpayers can appeal IRS decisions in an independent forum. But just because you have the right to challenge an IRS finding doesn't mean you won't be subject to filing deadlines. Courts have repeatedly found that the bill of rights does not give taxpayers the right to ignore IRS deadlines for filing an appeal.

IRS Office of Appeals

The Office of Appeals operates independently within the IRS and can resolve taxpayer disputes with the agency. When you get a notice related to collection, it will include information on your collection appeal rights. Be sure to read the appeals information closely because it will lay out the deadlines for filing an appeal. After you have filed an appeal, the IRS will stop all collection actions until the issue gets resolved. The IRS's Taxpayer Advocate Service also helps taxpayers resolve their problems with the agency.

Tax Court

If a taxpayer disagrees with the decision of the Office of Appeals, they can appeal that decision to the U.S. Tax Court. You can also file an appeal with your local federal district court or the U.S. Court of Federal Claims, but most taxpayers choose to appeal to the Tax Court. A Tax Court appeal does not need the taxpayer to pay the full amount due before filing, but the other federal courts demand payment of the disputed amount up front (your suit would be for a refund). The Tax Court also offers taxpayers more leeway in presenting their cases.

Contact the IRS For Payment Options

Many taxpayers who owe money never think of contacting the IRS. But the IRS can be helpful if you can't pay your balance in full. It also offers payment options, including monthly installments under an individual payment plan.

An installment agreement can also help reduce late payment penalties. That's because the failure-to-pay penalty gets cut in half with an IRS installment agreement. If you continue to make payments under the installment agreement, you will stay in good standing with the IRS, and it will not pursue further collection actions.

If you can't repay your tax debt and even an installment plan will not work, you may be able to negotiate an offer in compromise (OIC). An OIC allows taxpayers to settle their tax debt for less than the total amount owed. An offer in compromise gets evaluated on a case-by-case basis, but the IRS is unlikely to grant an OIC unless you cooperate with providing information about your:

  • Ability to pay
  • Income
  • Expenses
  • Asset equity

You can have a tax attorney or other tax professional help with the offer in compromise process to negotiate a tax settlement based on what you can afford. To prepare for an OIC negotiation, gather information about your income, savings, living expenses, rent or mortgage payments, etc.

Still Have Questions? Talk to a Tax Lawyer

When it comes to tax debt and collections, it can be tempting to ignore the IRS notices and hope it all goes away. But you should take immediate action when you learn the IRS is trying to collect money so that you can reduce your penalty and interest payments and protect your property. A local tax attorney can help you decide which options are best for you and how to clear up your tax debt.

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