While trouble of any kind with the IRS can induce panic in the sanest person, panicking is the last thing you should do.
It’s so easy to just “forget” to file taxes and extremely tempting not to pay them. Maybe you just didn’t have the cash to pay everything at once. Or you may have been listening to some bad advice, and now the IRS is breathing down your neck!
At least you didn’t do it on purpose, did you? Because that’s called tax evasion. That’s highly illegal, you know.
Well, you can’t hide in the basement, hoping it will all go away. It won’t. It will just get worse. So, put on your adulting cap, and let’s do this thing.
Here’s what to do if you find yourself in trouble with the IRS.
What Kind of Trouble Are We Talking About?
How much trouble you’re in depends on the circumstances. Some troubles are easily handled, while others … not so much. Most IRS trouble stems from non-filing and non-payment of taxes. If you let it go on long enough, you can amass significant amounts of IRS bills for back taxes.
Oh, and guess what? The financial pain doesn’t end there. The IRS also charges interest and penalties for these infractions. After a while, non-filing and non-payment can result in some other difficulties:
- A private debt collection agency comes after you.
- You lose your passport.
- Tax liens against your property, causing problems with selling it or even using it for collateral for a loan.
- Seizure of property (also known as a tax levy).
- Wage garnishment and leaving you with a smaller paycheck and an angry employer.
- Court, in case you have not addressed the problem or willfully evaded taxes.
- Bankruptcy from paying your taxes and handling all the other expenses of life, especially if you lose your job.
- Prison for that willful tax evasion thing.
Uncle Sam is very serious about taxes, so you should be, too. Yet, you should not panic.
Keep Calm and Call Your Tax Professional
The first thing to do when you realize you are in trouble with the IRS is to call your tax professional. Tax professionals are helpful individuals in many ways.
- If you forgot to file or pay for years at a time, a tax professional can get everything organized before you try to deal with the IRS.
- If the IRS sent you notice of a problem with a tax return, the tax professional who prepared it should fix it. If you made the error, ask a tax professional to help you.
- If you receive notice of an impending audit, contact a tax attorney to help you guard your interests.
- If you are charged with criminal tax evasion, definitely get yourself a tax lawyer who is familiar with these cases.
The point is that you don’t have to do it alone. There are people out there who can navigate the labyrinthine tax code. Some of them do it on a sliding scale, but whatever you pay for assistance is worth it in eliminating the frustration, aggravation, and fear working with the IRS can cause.
Don’t ignore the problem, it won’t go away. Always reply to every IRS notice in writing by the date shown on the notice. And do not speak to the IRS if they show up on your doorstep.
While it’s likely you have received more than one notice that they were on their way, you should have representation with you before starting any conversation. You have the right to decline to speak with them and to tell them to talk to your lawyer.
Get a card from the agency representative. Be polite but firm. Keep quiet until you can consult with your attorney or other tax professional.
Also, please don’t yell at anybody. Your tax professional is just trying to help and, whether you like it or not, the IRS is just trying to do a job.
An Example – The CP3219A Notice of Deficiency
Let’s say you receive a letter from the IRS entitled CP3219A Notice of Deficiency. All it means is that there is a discrepancy on your tax return. Something you reported didn’t agree with something someone else reported on you.
For example, your employer withholds payroll taxes from your wages and reports a different income amount from what you wrote down on your tax return. The notice is not a “bill.” It is a notice providing you with valuable information about how to proceed to resolve the issue.
You have options to agree or to disagree (with support for your argument), and it’s the first step towards reconciliation. And just because they like mailing stuff, you may have received a CP2000, a “prenotification” gently warning you there is a discrepancy. Respond and fix it as the IRS recommends, and you may not get the CP3219A after all.
If You Owe, Pay
The IRS is primarily interested in getting taxes collected. Anything else is superfluous and takes time away from collecting taxes. If you owe them money, pay them, and they go away.
Here are a couple of caveats.
- If you filed late, you owe a penalty.
- If you pay late, you owe a penalty and interest.
- The more taxes you owe, the more interest you are charged.
- Penalties and fees for lateness and failure to file or pay pile up rather quickly.
If you owe more than you can pay all at once, pay as much as possible and work with the IRS and your tax professional to set up a repayment plan that fits your means. You can pay overtime using an installment plan, understanding that interest will continue to accrue on the unpaid balance. Or, if there is no possible way on earth you can pay in full, you may be eligible for an Offer in Compromise.
You can get an offer in compromise a bit more easily if you qualify for the Fresh Start Initiative, an IRS program that makes it easier to afford your tax payments. The qualifications aren’t as stringent as those for an offer in compromise.
An offer in compromise isn’t a get-out-of-paying-taxes-free card. You can be ineligible for several reasons:
- You haven’t filed all your tax returns.
- You are in an open bankruptcy proceeding.
- You haven’t made any of the required estimated tax payments.
- You own a business and haven’t submitted all the tax deposits.
- You are able to pay your tax debt with an installment plan or as a lump sum.
Other ways to pay include forfeiting any refunds due and giving up your social security.
Taxpayer Advocate Service Assistance
If you’re having significant trouble with the IRS that you have not been able to resolve through direct contact with the agency, you can try using the Taxpayer Advocate Service. The TAS was set up by Congress for the sole purpose of protecting your taxpayer rights.
The TAS is a response to repeated complaints of unresolved problems taxpayers have had over the years trying to deal with the IRS.
To be eligible, you must have been trying to deal with the IRS already without resolution. You must also be experiencing “economic harm” or “significant cost” due to the lack of resolution. The IRS even says that economic harm can include the inability to pay for representation.
If you qualify, you receive an advocate to work on your problem, free of charge. The advocate does all the research and deals with the IRS for you. Also, the advocate can help you avoid problems in the future with some helpful advice.
Stay Out of Trouble from Now On
Speaking of the future, now that you will be dealing with the IRS for the next decade, try to stay out of trouble from now on.
- File your taxes on time every time.
- Pay your taxes on time or request an extension by Tax Day. Then pay before the extension if over.
- Keep all records, neatly and accurately, to make tax preparation easier and eliminate errors.
- Respond to all IRS notifications as requested and by the due date.
Dealing with the IRS isn’t for the faint of heart. But it isn’t a reason to panic, either. If you find yourself in trouble, take a deep breath, call your tax professional, and calmly work things out. Then don’t make the same mistakes again.
Tawnya is an elementary special education teacher by day and co-blogger at Money Saved is Money Earned by night.
She holds an Honors BS in Psychology from Oregon State University and an MS in Special Education from Portland State University. She has had a pretty successful writing career, first as a writing tutor at the Oregon State University Writing Center, and in recent years, as a freelance writer.
Tawnya and co-blogger Sebastian have a wealth of knowledge and information about personal finance, retirement, student loans, credit cards, and many other financial topics. They teach people how to save money, make money, and understand money.