Back tax issues with the IRS are a serious financial problem. This is largely due to penalties and interest accruing over time. What was once a $1500 tax debt, may balloon to $2500 or more. You can be sure, the IRS will not forget the taxes you owe. In fact, their automated systems are built to ensure collection actions are swift and efficient. Collections efforts begin with IRS notices and, eventually will lead to legal action (tax liens, bank levies, wage garnishments, etc). IRS legal proceedings are complex and costly to the taxpayer. It is important to resolve your tax debts before the legal process begins.
Step 1: Verify How Much You Owe
Don’t assume the amount reflected on the IRS notice is the what you actually owe. The Internal Revenue Service does make mistakes. So before you do anything, dust off your tax files and compare your numbers against the IRS collection notice. The amounts might be different because of penalties and interest, so don’t look for exact numbers. If you can’t make sense of it, give us a call. We can figure this out for you very quickly. (Ask A PRO)
* Tax Tip: If you did not file a tax return for the year in question, the IRS may have filed one for you. A Substitute For Return (SFR), usually calculates a higher income tax than, if you were to file on your own.
Step 2: Recalculate Your Back Tax Return(s)
Commonly, taxpayers make errors and/or omissions on their tax return, resulting in a superficial tax debt. You want to know what to look for when recalculating your tax return. Experience is key here. We advise you to brush up on your “tax deduction” knowledge for that specific year or consult a back tax professional. (Ask A PRO)
If after recalculating your tax return, you determine no taxes are owed, congratulations! You just resolved your back tax problem at little or no cost. In addition, the penalties and interest you may have owed, are no longer applicable. All that’s left for you to do, is mail your tax return and follow up with the IRS in a month or so.
If after recalculating your tax return, you can establish that you owe back taxes, proceed to Step 3.
* TAX TIP: Form 1040X (Amended US Individual Tax Return) may not be sent electronically. Only original returns may be filed over the internet.
Step 3: Determine How Much You Can Afford Towards Back Taxes
Now that your tax debt has been verified (Steps 1 & 2), you must evaluate your finances. You either have the money to pay off the debt or you can’t afford it. You should be thinking about how paying this tax debt, is going to affect you standard of living. How much can you pay a month, if you can’t pay the debt of in full? You need to figure this number out, before contemplating any tax settlement option. Paying off this debt, in whole or parts, should not put you and your family out on the street. However, if your family is starving and you are driving a Porsche, these concessions do not apply.
It is important to note, if paying off your tax debt creates a financial hardship, you might qualify for an Offer In Compromise. You can read more about this program here.
Step 4: I HAVE The Money To Payoff My Back Tax Debt (Otherwise Skip to Step 5)
Since you have the money, you can resolve your back tax issues. Pay off the tax debt as soon as possible. You need to stop the penalties & interest from accruing against your back taxes. The IRS interest rate for 2017 is 4.25% per year, which does NOT include the bigger penalties imposed by the IRS; “failure to pay penalty” or “failure to file penalty”. Read more on IRS penalties here.
* TAX TIP: If your tax debt is substantial, you should weigh out the cost-benefits of hiring a tax settlement firm, preferably a CPA. They may be able to help you reduce penalties and interest, which could end up saving you thousands of dollars.
Step 5: I DO NOT Have The Money
Proceeding from here will vary from case-to-case. We highly recommend professional advice if your tax debt is substantial.
Let’s break it down:
Tax Debt Owed: is between $1500 ~ $8500 (No Financial Hardships):
With these back tax amounts, we don’t always recommend engaging with a tax relief company. Settlement companies usually charge a minimum of $3000.00, to settle your tax debts with the IRS. The cost benefit, usually isn’t there. However, we do recommend having a professional take a look at your tax returns; if you have not done so already (as indicated in Step 2). Having a professional tax consultant review a return should not cost more than, $100 to $500.
Once the back tax amount is verified, you can use Form 9465 Installment Agreement Request to initiate process. Remember, only go for this option if, you don’t have a substantial financial hardship. (i.e low-income, death, disability, etc).
Tax Debt Owed: is $8500+ (No Financial Hardships):
If you owe at least $8500 or more to the IRS, you might want to have a back tax professional look things over. Specifically, you want to engage with a tax settlement firm that specializes in back tax resolutions. The reason for this recommendation is simple, it may save you a lot of money. The larger the debt, the higher our recommendation. Here are two ways they can save you money.
- A tax settlement firm knows how to negotiate an installment agreement that works for you. You want a monthly payment that is affordable. If the IRS pushes back on a monthly payment that you feel is affordable, your settlement firm should be able to push back. We can’t emphasize how important experience comes into play with IRS negotiations.
- It is not guaranteed but, a tax settlement firm might be able to remove penalties and interest from your back tax bill. Depending on how much you owe, saving money on penalties and interest could, greatly outweigh the costs of professional back tax help. Not to mention, they do all the work for you. Peace of mind has an intrinsic value.
If you are in need of some free advice, contact one of our back tax professionals. (Ask A PRO)
I DO NOT Have the Money (Do-It-Yourself):
Obtaining a tax settlement with the IRS, can be accomplished on your own. Again, if the amount you owe is substantial, we highly recommend back tax professional aid. In addition, financial hardship cases are complex and require a lot of experience to get it done right. If after considering these points, you decide to settle your taxes on your own, you need to familiarize yourself with all the Fresh Start options. We further recommend you contemplate why those options exists and determine where you fit in. I recommend reading the following links to get you started. If you need any advice, feel free to contact us. (Ask A PRO)