What to Do If You Owe Back Taxes

Back Taxes

Back Taxes

Universal Finances | Credit Card, Finance and Forex Information

There’s a saying that there are only two certainties in life: death and taxes. If you’re one of the millions of people who owe taxes from previous years, you might feel like paying off the bill is going to lead you to an early death. After all, the letters from the Internal Revenue Service are frightening enough, adding on penalties and interest, and threatening to garnish your wages or seize your personal property as payment on your bill.

Whether you owe back taxes because you made a mistake on your return, you deliberately didn’t pay or because you could not pay what you owed, there’s no need to panic. While you’ll most likely have to pay most, if not all, of what you owe to the IRS, in most cases the agency will work with you to find a way to do so over time.

However, the most important thing is to contact the IRS and address the problem. The longer you ignore it, the worse it gets.

Step One: Determine the Scope of the Issue and Make a Plan

Chances are, if you owe back taxes — you know it. The IRS is not lax when it comes to sending notices about your debt. The longer you take to respond, the more persistent they become. Because interest and penalties accrue daily, the amount you owe could be different than the amount listed on the last statement. Your first step is to get an accurate record of how much you’re actually expected to pay. If you owe less than $10,000, in most cases you’ll have to pay off the debt in three years. When it comes to larger debts, you have more time. If you agree with the amount you owe and can come up with a manageable plan for paying, apply for an installment payment plan using Form 9465 or via the IRS Online Payment Agreement application. You’ll hear back in 30 days regarding the status of your request. If your terms are reasonable, you’ll start making payments immediately.

Step Two: Get Outside Help

If you owe a significant amount in back taxes – or you never filed for several years – you may need to hire outside assistance to determine the best course of action. An experienced tax attorney can help you get more time to pay off the bill or negotiate

lower payments on your behalf. An attorney may even be able to have the penalties and interest reduced or help you avoid stiffer penalties for tax evasion.

If you’re in dire straits and cannot pay what you owe even with an installment agreement, an attorney may be able to negotiate an offer in compromise (OIC) or a significantly reduced payment to settle your debt. An OIC is not easy to get — fewer than 20 percent of all offers are accepted — but if you owe more than the IRS could ever reasonably expect to collect, it’s a viable option.

Because the OIC process is strenuous and so few applications are accepted, beware of any attorney or organization that guarantees they can reduce your tax debt to pennies on the dollar or that you qualify for such an arrangement. A fair number of these organizations are known to collect large payments up front, often thousands of dollars, and fail to achieve the results customers expect. Before hiring any attorney or tax representative, perform due diligence on their education (such as completing online graduate tax programs or other tax-specific training), licenses and track record in your state to ensure you’re not spending money that could go toward your tax bill on a service that won’t get results.

Step Three: Prevent the Problem From Recurring

Once you have a plan for taking care of your tax debt, make it a priority to follow the agreement to the letter and adhere to your end of the bargain. Missing or late payments can void the deal and even the best attorney can’t repair the damage.

In addition, take steps to avoid owing money on future tax returns. Adjust the withholding amounts from your paycheck or make additional payments in advance to offset your annual tax bill. Also, file your taxes on time and make payment arrangements before April 15 to avoid hefty penalties that increase the bill.

Owing back taxes is a serious issue that can’t be ignored. Taking care of the problem by making payment arrangements or hiring an attorney can help you avoid consequences like fines, liens, levies, garnishments or even jail time — and help you resume living your life.

About the Author: Frances Erickson is a tax attorney who specializes in complex tax situations. She is especially skilled in negotiating offers in compromised and reduced payment agreements.

What to Do If You Owe Back Taxes

Source: universalfinances.com

Category: Taxes

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