If you receive a tax bill this summer for outstanding taxes, you are expected to pay that bill in full, including penalties and interest. If you can’t pay the outstanding balance, it’s sometimes wise to take out a loan to pay the bill in full instead of making installment payments to the IRS. This is because acceptable Installment Agreements (IAs) require approval. Often, what the IRS approves may be beyond your ability to pay. Any amount sent will be deducted from your balance, however you may still be vulnerable to collection enforcement action.
The Internal Revenue Service (IRS) is the most powerful collection agency in the world. Taxpayers who owe taxes often find themselves in difficult situations due to the harsh tactics used to collect. The IRS can garnish your bank account, wages, investment(s), place liens on your property, and even destroy your credit.
The good news is that the IRS also offers many different resolution options designed to help taxpayers who are unable to pay their tax liability. The bad news is that a very large percentage of taxpayers must make the biggest mistake of all. They do not respect the IRS instead of fearing them.
As such, the first thing you should do is not to ignore any warnings you receive. Most notices give you the opportunity to respond or get additional time to respond if necessary. Then schedule a consultation with a licensed tax professional. Licensed tax professionals have demonstrated proficiency in understanding how to apply the rules that govern various tax scenarios and compliance issues.
Another important step is to review the tax return(s) from which your tax liability is derived. Simple mistakes, like claiming income or deductions twice, can cause you to miss out on eligible deductions or increase your tax liability. This could easily be corrected by filing an amendment.
If your liability is due to underpayment and you’re a W-2 employee, make changes to your withholding amount to ensure you don’t create another tax bill in the future. If you’re an independent contractor receiving a 1099, be sure to make estimated tax payments in the future. This will go a long way in showing that you have not only corrected the problem, but that you plan to be compliant in the future.
Also, learn how to minimize penalties and interest. Owing a tax liability can be challenging enough without additional assessments that could significantly increase your tax bill. You may qualify for exceptions to underpayment of tax penalties or reduction of penalties.
Lastly, don’t panic. If you respond reasonably to notices and are honest with the IRS, they are not bad creditors to deal with. If all else fails and you can’t afford professional assistance, contact your local taxpayer advocate. You may qualify for free assistance.