If you owe money to the IRS, opening another IRS letter may be the last thing you want to do.
Maybe you already know you cannot afford to pay the balance. Perhaps you have been receiving notices for months and are hoping to deal with the problem when your finances improve. Or maybe the amount owed has become so overwhelming that you simply do not know where to begin.
Unfortunately, ignoring an IRS tax debt can turn a financial problem into a collection emergency.
The IRS has powerful collection tools that ordinary creditors do not have. An unresolved federal tax debt can potentially lead to a federal tax lien, bank levy, wage garnishment, seizure of property, assignment to an IRS Revenue Officer, and other collection action.
The good news is that taxpayers who cannot afford to pay their taxes in full may have several options for resolving the debt.
The key is to address the problem before the IRS makes the decision for you.
What Happens After You Owe the IRS?
Once the IRS assesses a tax liability and the balance remains unpaid, the IRS collection process can begin.
The first letters may seem relatively routine. You may receive notices showing the amount owed and requesting payment.
But an IRS collection case does not necessarily remain at that stage.
If the liability continues to go unresolved, additional penalties and interest may accrue, and the IRS can move further into the collection process.
Depending upon the circumstances, that can eventually include:
- Filing a Notice of Federal Tax Lien
- Levying bank accounts
- Garnishing wages and other income
- Levying certain payments owed to you
- Seizing certain assets
- Assigning the case to an IRS Revenue Officer
- Restricting or revoking a passport in cases involving seriously delinquent federal tax debt
- Taking other authorized collection action
This is why taxpayers should not assume that an IRS letter can simply be put in a drawer and addressed sometime in the future.
“I Can’t Afford to Pay the IRS, So What’s the Point in Calling?”
This is one of the most important misconceptions about IRS tax debt.
You do not necessarily have to pay the IRS in full to begin resolving the problem.
In fact, inability to pay the entire balance is precisely why several IRS collection alternatives exist.
Depending upon your financial circumstances, possible tax-resolution options may include:
IRS Installment Agreement
An Installment Agreement allows qualifying taxpayers to make monthly payments rather than paying the entire tax liability immediately.
The appropriate payment can depend upon the amount owed, the age of the liability, your income and expenses, your assets, and the type of installment agreement being requested.
Offer in Compromise
An Offer in Compromise may allow a qualifying taxpayer to settle an IRS tax liability for less than the full amount owed.
Contrary to many tax-relief advertisements, however, an Offer in Compromise is not simply a matter of offering the IRS whatever amount you can afford.
The IRS generally analyzes your assets, equity, income, allowable expenses, and future ability to pay when evaluating an offer.
A careful financial analysis should therefore be performed before deciding whether an Offer in Compromise is an appropriate strategy.
Partial Payment Installment Agreement
Some taxpayers cannot afford monthly payments sufficient to fully pay their tax debt before the IRS’s collection period expires.
In appropriate circumstances, a Partial Payment Installment Agreement may allow the taxpayer to make monthly payments even though those payments are not expected to fully satisfy the liability before the applicable collection period ends.
Currently Not Collectible Status
What if you cannot afford any meaningful IRS payment?
If making payments would prevent you from meeting necessary living expenses, you may qualify for Currently Not Collectible status based upon financial hardship.
Currently Not Collectible status does not eliminate the underlying tax liability, but it can temporarily suspend active collection efforts while the taxpayer lacks the ability to pay.
Penalty Abatement
Penalties can significantly increase an IRS balance.
Depending upon your circumstances and compliance history, you may qualify to have certain penalties removed through First Time Abatement or reasonable-cause penalty relief.
Penalty abatement can sometimes substantially reduce the overall amount owed.
What Is a Federal Tax Lien?
One potential consequence of unresolved federal tax debt is a federal tax lien.
A federal tax lien is the government’s legal claim against your property when you fail to pay a federal tax liability after demand.
The IRS may also file a public Notice of Federal Tax Lien to establish its interest against other creditors.
A tax lien can affect real estate and other property and can complicate financial transactions.
A lien is different from a levy.
A lien is a legal claim against property. A levy is the actual legal seizure of property to satisfy the tax debt.
If your IRS matter progresses from collection notices toward levy action, the situation becomes considerably more urgent.
Can the IRS Take Money From Your Bank Account?
Yes.
If the IRS satisfies the applicable legal requirements for levy action, it can issue a levy to a financial institution and potentially take funds from your bank account.
Imagine discovering that money intended for your mortgage, rent, utilities, payroll, or other essential expenses has been frozen because of an IRS levy.
By the time that happens, you are no longer simply trying to resolve old tax debt. You may also be trying to address an immediate financial emergency.
That is why the best time to address an IRS levy is usually before the levy occurs.
Can the IRS Garnish Your Wages?
The IRS can also levy wages and other income.
A wage levy can be particularly disruptive because it can have a continuing effect. Your employer may be required to send a portion of your wages to the IRS rather than paying those funds to you.
For taxpayers already struggling financially, losing a substantial portion of each paycheck can make an existing problem considerably worse.
It also brings your employer directly into a tax problem that you may have hoped to keep private.
What If an IRS Revenue Officer Contacts You?
Some collection cases are assigned to an IRS Revenue Officer.
A Revenue Officer is an IRS collection employee responsible for resolving delinquent tax accounts. Revenue Officers can request financial information, establish deadlines, investigate assets and income, and pursue collection action when a taxpayer does not cooperate or resolve the liability.
If a Revenue Officer has contacted you, your case deserves prompt attention.
Statements you make and financial information you provide can affect how the IRS evaluates your ability to pay. Before submitting detailed financial information, it can be important to understand how the IRS will analyze your income, expenses, assets, and equity.
An attorney authorized to practice before the IRS can communicate and negotiate with the Revenue Officer on your behalf.
Unfiled Returns Can Prevent You From Resolving the Tax Debt
Tax resolution is not only about negotiating the amount you already owe.
The IRS generally expects taxpayers to be in filing compliance before approving many collection alternatives.
If you have several years of unfiled returns, those returns may therefore need to be addressed before an installment agreement, Offer in Compromise, or other long-term resolution can be completed.
This is one reason I provide tax preparation and compliance assistance in connection with tax-resolution matters. Addressing the filing problem and the collection problem together can provide a clearer path toward becoming compliant.
Waiting Can Reduce Your Options
There is another reason not to ignore IRS correspondence: some IRS notices carry important deadlines.
For example, certain Final Notices of Intent to Levy provide taxpayers with a limited period to request a Collection Due Process hearing.
Missing a deadline can affect procedural rights and the options available for challenging or responding to collection action.
Even when an immediate statutory deadline is not involved, waiting until a bank levy or wage garnishment occurs can transform a tax-resolution matter into an emergency.
Don’t Assume You Owe Too Much—or Too Little—to Get Help
Some taxpayers avoid contacting a tax attorney because their debt has become enormous and they believe nothing can be done.
Others do the opposite. They assume their balance is not large enough for the IRS to take serious collection action.
Neither assumption is a good tax-resolution strategy.
The amount owed is important, but it is only one part of the analysis.
When evaluating an IRS collection matter, I may consider factors such as:
- Total tax liability
- Tax years involved
- Applicable collection statutes
- Household income
- Necessary living expenses
- Bank accounts and investments
- Retirement accounts
- Real estate equity
- Vehicles and other assets
- Business interests
- Filing compliance
- Prior payment arrangements
- Existing liens or levies
- Collection notices already issued
- Whether a Revenue Officer has been assigned
Two taxpayers owing exactly the same amount can have very different resolution options.
The Worst Strategy May Be Having No Strategy
Taxpayers frequently contact me after spending months—or sometimes years—hoping an IRS problem will somehow resolve itself.
During that time, the IRS may continue sending notices, penalties and interest may continue accumulating, and the collection process may continue moving forward.
You may have more options than you think.
But determining the appropriate solution requires understanding where your case currently stands and what the IRS can do next.
That may mean negotiating an Installment Agreement. It may mean evaluating an Offer in Compromise. It may involve Currently Not Collectible status, penalty abatement, a Partial Payment Installment Agreement, addressing unfiled returns, responding to a Revenue Officer, or challenging collection action through the appropriate administrative process.
The important thing is to develop a strategy rather than waiting for the IRS to dictate what happens next.
Indiana Tax Attorney for IRS and State Tax Resolution
I am Eric C. Keuling, founder of the Keuling Law Firm, and I have more than 18 years of tax and tax-resolution experience. Before founding my law practice, my professional tax experience included serving as a Tax Director with Grant Thornton in Tokyo, Japan. I also hold an LL.M. in Taxation from the University of Florida Levin College of Law.
Today, I represent individuals and businesses throughout Indiana in tax-resolution matters involving the IRS and Indiana Department of Revenue.
When you hire my firm, I personally handle your tax matter. Your case is not passed from a salesperson to a case manager. I work directly with you to understand the problem, evaluate your financial circumstances, communicate with the taxing authorities, and pursue an appropriate resolution.
My tax-resolution practice includes:
- IRS and Indiana back taxes
- Installment Agreements
- Offers in Compromise
- Partial Payment Installment Agreements
- Currently Not Collectible status
- Penalty abatement
- Tax liens and levies
- Wage garnishments
- IRS Revenue Officer representation
- Collection Due Process matters
- Unfiled and delinquent tax returns
- Tax preparation and compliance assistance
- Payroll and employment tax liabilities
- Trust Fund Recovery Penalties
- IRS and Indiana tax audits
- Other federal and state tax controversies
Owe Back Taxes? Address the Problem Before the IRS Escalates Collection.
If you owe the IRS or Indiana Department of Revenue and have been putting off dealing with the problem, the next collection notice may be more serious than the last one.
You do not need to wait until your bank account has been levied, your wages have been garnished, or an IRS Revenue Officer is demanding financial information to seek help.
Contact the Keuling Law Firm to schedule a consultation. I can review your tax situation, explain the collection risks you may be facing, identify the resolution options that may be available, and develop a strategy for moving forward.
The sooner you understand your options, the sooner you can begin taking control of the problem—instead of waiting to see what the IRS does next.
This article is provided for general informational purposes only and does not constitute legal or tax advice. Tax-resolution options, IRS collection procedures, and applicable deadlines depend upon the particular facts and circumstances of each taxpayer.