So these little envelopes that read “Official Business – Penalty for Private Use, $300” kept showing up in your mailbox.  You kind of had an idea of what they were about since they said they were from the Department of The Treasury.  But you figured that if you ignored them they might go away.  Or maybe you just needed a little more time to save up some money so that you could settle your debts.  But time kept passing, you never settled up and the letters kept right on coming.  When you finally decided to open one of those envelopes, it said that the IRS was in the process of levying you.  Now what?

If you are faced with tax related debt, it’s important that you take the following steps as soon as you can:

Own the situation.  All difficult situations only get worse the longer that you prolong dealing with them.  Think about it, does that achy tooth get better by itself?  Will that funny noise your car is making just go away if you ignore it?  Do those termites in your house stop munching on everything if you just pretend they aren’t there?  The answer to all of the above is no.  The first step to dealing with tax debt is to own up to it and start the process of resolving it.

Assess the damage.  We recently were dealing with a client who hadn’t filed taxes for 6 years.   They didn’t want to deal with the situation because they figured they owed thousands of dollars.  Well, when we prepared their returns it turned out they only owed about two thousand dollars – initially.  Because they didn’t deal with it early on the IRS penalties and interest just about doubled the initial balance owed.  Thus, it’s important that you assess just how much is owed as soon as possible.  Our experience has been that the situation typically isn’t as bad as a taxpayer thinks.  Additionally, if you are willing to work with the IRS you will find that they’ll reciprocate.

Seek professional help if needed.  Some tax debts can be settled without too much professional assistance.  Did you know that if you owe $50,000 or less in combined individual income tax, penalties and interest you can apply online for an installment agreement?  Yup, no need to speak to anyone at the IRS or have a professional get involved.  Now that is, of course, if you can make the payments.  If you owe a lot, don’t have substantial assets or just can make any sort of “significant” payment, then maybe you should have a professional look at your situation.  They may be able to recommend options that can help you pay your debt AND not put yourself under financial stress while you do so.

Ensure that your professional is qualified.  There are lots of boiler room tax resolution firms out there that will promise you they can settle your debt for pennies on the dollar.  When reviewing any firm, make sure that they have the following:

  • Professional, and Useful Website
  • Successful Track Record
  • Friendly, Helpful Representatives
  • Easy-to-Understand Fee Structures
  • Free Analysis and No Guarantees

Figure out your options.  When it comes to tax resolution, many people hear the advertisements touting how they can settle for less than they owe (i.e. an offer in compromise).  While this is in fact true, this is not the case for 80% of taxpayers because they will not qualify for an OIC.  You have to remember that the IRS is the collections arm of the US Treasury and that they are not in the business of giving away free money.  With that said, tax resolution typically falls into the following categories:

  1. File unfiled tax returns
  2. Dispute the tax debt on technical grounds
  3. Request penalty abatement
  4. Request innocent spouse relief if the debt was the fault of your spouse or ex-spouse
  5. Pay the tax debt in full
  6. Request an installment agreement
  7. Put the debt into currently not collectible status
  8. Apply for an offer in compromise
  9. Await expiration of the collection statute expiration date

Move forward.  Once you outline your arrangement to resolve your tax debt, make sure that you have a plan in place so that you don’t create any new debt.  For example, if you receive most of your income via 1099, make sure that you make estimated payments though out the year.  Lastly, take a personal vow to never generate tax debt going forward.  While there are numerous people you can owe, the IRS is really the only entity that can make your financial existence almost unbearable if you let it get that bad.  Thus, let’s all try and stay on their good side shall we?

Until next time…