What We Are Going to Cover
– Ignoring your tax debt won’t make it go away. In fact, it will only get worse.
– The IRS is willing to work with taxpayers who have tax debts they cannot pay
– 10 Reasons you shouldn’t ignore your tax debt:
- IRS notices
- Automated Collections
- Tax refund seizure
- Interest will build up
- You will be charged penalties
- The IRS could file a federal tax lien
- IRS can issue a levy
- A revenue officer may show up
- You may not be able to leave the country
- IRS could send your case to a debt-collecting agency
According to Richard Millhouse Nixon, “Make sure you pay your taxes; otherwise you can get in a lot of trouble.” Although he didn’t say it very poetically, President Nixon was definitely on to something.
It has been well-established that it is human nature to avoid unpleasant or uncomfortable situations that can cause unease or pain. We also have a fear of the unknown. It is ingrained in our DNA. It is how we have survived as a species. Back when we were cavemen (and cavewomen), we had to be afraid of the unknown because virtually anything – at any given time – could have been a predator looking to eat us…or kills us for our food and fire (our most precious resource back then).
That fear of the uncomfortable or unknown carries on today and as a tax attorney I see it day in and day out with my clients’ fear of the IRS. Most people view the IRS (and dealing with them) as unpleasant, uncomfortable, and even painful (figuratively speaking) at times. That may be true, but I can tell you with 100% accuracy, that NOT dealing with them (and your tax issues) can be far worse.
If you are like most American taxpayers with tax issues, you are probably wondering if contacting the IRS will put you on their radar and get you into even more trouble. While I can understand and even appreciate your fear of this, I can also tell you that that is a foolish way of thinking. What will – without a shadow of a doubt – get you into trouble, is avoiding the issues. And sooner or later your problems will catch up with you and you will be forced to deal with them. You can only run for so long. And in doing so, you actually make the situation far worse for yourself as opposed to dealing with it sooner head-on.
The IRS has many tools at its disposal to collect tax debt. Some of these tools include: federal tax liens, levies, wage garnishment, etc. I won’t even get into the amount of money that will continue to add up when you take into account interest and penalties. They will continue to grow every single day that you don’t deal with the issue once and for all.
Now I am not just here to rain on your parade and bring you troubling news. There is an upside to all of this. While the IRS definitely does want what is owed to them, they are also willing to work with you. It is in their best interest after all, if they ever want to see a dime of what you owe.
So I bring you good news. The IRS has several different options for those who cannot pay their taxes (or file on time). Some of the things they offer include (but are not limited to): filing extensions, settlement options, innocent spouse relief, monthly payment plans tailored to your income and ability to pay, etc. They even have options for those who are suffering from financial hardship.
If everything I just said wasn’t enough to get you to get in touch with the IRS and work something out (or get in touch with a qualified tax attorney to help you), allow me to outline 10 more reasons you should not ignore your tax bill and what can ensue if you do.
1. IRS Notices
The IRS isn’t shy about sending notices by mail. And while they may seem just a minor nuisance at first, they do become increasingly more aggressive in no time at all. And if you ignore or neglect to respond to said notices, the IRS doesn’t just throw up their hands and say “oh well…at least we tried.” No. They step up their game.
2. Automated Collections
If the barrage of notices doesn’t seem to scare you into submission, the next tactic the IRS will employ is to place your account in the IRS Automated Collection System (ACS). Their primary function is to collect back taxes. And they will use any tools at their disposal to do so. For instance, they can issue liens, levy bank accounts and even garnish wages.
ACS notices will start to get a bit more aggressive and threatening than the notices you were receiving before. And these are not just empty threats either. ACS has everything they need to carry out those threats…or don’t need as the case may be. For instance, the IRS doesn’t even need a court order to carry out any of the things listed above (liens, levies, wage garnishments). Any other collection agency needs the “okay” from a judge to do so. But not the IRS. They are the IRS….they can do whatever the want in an attempt to collect what is owed to them.
3. Tax Refund Seizure
”Next to being shot at and missed, nothing is quite as satisfying as an income tax refund.” I think we can agree that F.J. Raymond said it best.
Ready for the news you were dreading? If your tax balance continues to go unpaid,, the IRS is within its rights to confiscate any tax refunds owed to you in subsequent years until the tax debt is satisfied. I mean, they don’t just take it and keep it for themselves. They do apply it to your tax debt. But still, I am sure you were counting on and looking forward to that refund.
4. Interest Will Build Up
Just like with any other bill collector, you will be charged interest on your tax debt (and penalties). So the longer you go without paying, the more you will owe. The current rate is about 4-5% annually.
5. You Will Be Charged Penalties
In addition to interest, you will also be charged the “failure-to-pay” penalty (and the failure-to-file penalty if you don’t file your returns on time). The failure-to-pay penalty is 0.5% per month. However, if the IRS has sent you many notices to collect your tax debt and you have made no arrangements to pay, the rate doubles to 1%. There is a silver lining though. Once you set up a payment arrangement with the IRS, the rate drops to 0.25% per month.
6. The IRS Could File A Federal Tax Lien
If you owe the IRS money and you received a notice (or several notices) about your tax debt but you neglected to do anything abut it, the IRS can file a Notice of Federal Tax Lien. A tax lien is not the same thing as a levy (which we will discuss later).
A tax lien is essentially a claim on your property. It ensures that the government gets first rights to your property over other creditors. It is basically like the IRS calling dibs on your house. Furthermore, tax liens become a matter of public record. And while the government probably won’t come and kick you out of your home, a tax lien can make it incredibly difficult to sell that property or to secure a line of credit due to the fact that the IRS gets paid first.
As if all of that wasn’t bad enough, there is more. Your credit score will also take a big hit. So you can say goodbye to that car loan or rental agreement. Note: declaring bankruptcy will not get rid of tax debt and any associated liens.
There is good news though. Although the IRS has every right to file a Notice of Federal tax lien on a smaller balance, they typically will not do so for debts less than $10,000. The IRS also will not file a lien if you enter into certain payment arrangements.
7. IRS Can Issue A Levy
Not to be confused with a tax lien which simply protects the IRS’s claim on your property, a levy is much more serious. A levy is when the IRS seizes your property and sells it off to help pay off your tax debt. However, it is a huge hassle for the IRS to do all of that so they typically will only levy your monetary property. There are a few different types of levies involving money but the most common are:
1. Wage Levies Or Wage Garnishments
This is where the IRS notifies your employer that a portion of your paycheck is to go to the IRS to satisfy your tax debt. Your employer has no say in the matter and must comply. As you can imagine, this can be embarrassing to say the least. Typically, though, if you enter into a payment arrangement with the IRS (and you stay compliant with said payment arrangement), the IRS will usually back off and remove the levy.
2. Accounts Receivable Levies
This applies to small business owners and independent contractors. Just like a wage garnishment, the IRS seizes money you have earned. This will also go away with a payment arrangement.
3. Bank Levies
This is just what it sounds like. The IRS takes money directly from your bank account. Again, if you enter into a payment arrangement with the IRS, the levy should go away.
8. A Revenue Officer May Show Up
What is a Revenue Officer you ask? A Revenue Officer is an IRS employee who is tasked with collecting on a tax debt. They usually show up when you owe large sums of money to the IRS, owe for several years, and/or have unfiled tax returns. It is wise to do everything your Revenue Officer says and to do so by the prescribed deadline as they have the authority to issue liens and levies to quickly enforce back tax issues.
9.You May Not Be Able To Leave Country
As if the IRS didn’t already have enough tax-collecting weapons in their arsenal, they recently added one more: the revocation or denial of your passport.
If you owe more than $51,000 and the IRS has tried (and failed) to get you to satisfy that debt, the IRS can label you “seriously delinquent.” If that happens, the IRS notifies the State Department who then has the authority to deny you renewal of your passport or completely deny you a passport altogether if you are attempting to obtain one.
10. IRS Could Send Your Case To Debt-Collecting Agency
Just like with most creditors, if the IRS cannot collect on the debt you owe them, they can then send your case to a private debt collector.
If that happens, you will be inundated with phone calls several times a day and an endless amount of headaches.
Have a question? Contact Venar Ayar.