The IRS and tax debt
There are very few governmental agencies that instill fear in United States citizens quite like the Internal Revenue Service. If you owe them money for past taxes, the fear is likely to be more of an anxious dread that an agent will knock down your door and haul you off to a debtor’s prison.
Tales of Wesley Snipes, Al Capone, Daryl Strawberry, MC Hammer and Willie Nelson serve as examples for the type of reach the IRS has, and its willingness to use it.
Fortunately, there are solutions if you owe back taxes that mean you don’t have to be the next Spiro Agnew (the only U.S. Vice President to resign and later plead no contest to tax evasion).
A few things to keep in mind first:
1. There is a legal process to IRS collections. You will receive notices and letters. Don’t ignore them.
2. Don’t stop filing your returns because you owe money for past years. Most options with the IRS aren’t available if you haven’t filed your taxes.
3. If you owe taxes, work with a good CPA or attorney to resolve the issues as quickly as possible.
Now that the prerequisites are out of the way, let’s talk about options to reduce, manage and eventually eliminate your tax debts:
1. Correcting past returns. It may not be available in every situation, but if you’ve prepared and filed your taxes on your own in the past, there may be exemptions or deductions available that you weren’t aware of. A CPA or accountant may be able to correct your returns, re-file them and mitigate/reduce any balance you may owe the IRS.
2. Filing an Installment Agreement. An Installment Agreement allows you to enter into a repayment plan with the IRS whereby you make monthly payments during a period of up to six years.
3. Filing an Offer in Compromise (OIC). An OIC allows a taxpayer to settle their tax debt for less than the full amount owed. There are qualifiers for an OIC and it’s not the best option for individuals with significant income or significant assets, but it can offer a tremendous savings on tax debt. It does usually require payments in the form of installments or lump-sums to settle the debt.
4. Filing a Chapter 13 bankruptcy. A Chapter 13 bankruptcy can potentially wipe away certain types of tax debt, or alternatively, allow you up to five years to repay your taxes. During this time, the IRS is barred from suing you, garnishing you, levying a bank account, or taking any collection action against you.
The first step in resolving your tax debt is to speak with a specialist: a tax attorney or a CPA. They can provide you with viable options to get out from under the IRS’s shadow and on the right track to addressing your debts.