| You prepare your tax return, and you discover that you did not have enough taxes withheld from your wages. You owe a substantial amount to the Internal Revenue Service, and you cannot make the required payment. What happens?
You should file your return in a timely manner even if you cannot make the full payment. This action will prevent the imposition of late filing penalties. The IRS will send you a bill, which is the formal start of the collections process. The bill will include information about the reason for the liability, the added penalties and interest, and the total amount due.
If you cannot pay the entire amount, the IRS urges you to pay as much as possible. The unpaid balance is subject to interest that is compounded daily along with a monthly late payment penalty. In many circumstances, it is advisable to pay the balance with a credit card or to borrow the money because the credit card or bank interest might be less than the interest and penalties imposed by the IRS.
The IRS offers some taxpayers an individual payment plan based on monthly installments. It is also authorized to temporarily suspend collection if the taxpayer is experiencing a significant financial hardship and is unable to make any payments. Interest and penalties will continue to accrue on the unpaid balance while the taxpayer is making installment payments or while collection is suspended.
The taxpayer who does not qualify for an installment agreement may choose to file an offer in compromise, which is an agreement between the taxpayer and the IRS that resolves the tax liability for something less than the full amount under certain circumstances.
The IRS stresses the importance of voluntarily contact by the taxpayer in order to resolve the unpaid balance. If the taxpayer does not make some attempt to either pay the bill or make arrangements to settle the action, the IRS may take collection actions to secure payment. These actions can include filing a notice of federal tax lien, serving a notice of levy, or offsetting a refund.
When the government files a notice of tax lien, it establishes itself as a creditor with an interest in your property. The lien, which is a claim against the taxpayer's presently owned and later acquired property, is required by law to establish the priority of the IRS over other creditors. The lien appears on the taxpayer's credit report, and, once it is filed, the IRS generally cannot release the lien unless all of the taxes, penalties, interest, and recording fees are paid.
After a notice of levy is issued, the IRS is allowed to take and sell a taxpayer's property to satisfy an unpaid tax liability. Assets subject to a levy might include wages, bank accounts, Social Security benefits, retirement income, cars, boats, or real estate.
The IRS is also authorized to offset the unpaid tax liability against any future federal tax refunds. In addition, it may levy any state income tax refunds and apply the proceeds to the unpaid federal tax liability. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |