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The Internal Revenue Service (IRS) is the main agency in charge of financing the United States government and is tasked with tracking down taxpayers who still owe federal taxes, including income, excise, and payroll taxes. The agency has many tools at its disposal to collect unpaid taxes, making it important to be aware of whether you owe the IRS money so that you can avoid facing penalties and interest.
Here are some signs that you might owe money to the IRS and not be aware of it:
- You get a notice in the mail. Notice by mail is the most common way the IRS notifies someone that they owe the IRS money, but the IRS may have difficulty delivering this notice to people who move frequently.
- You notice that your tax refund for the year is lower than anticipated or gone completely.
- Your wages or social security checks may be garnished.
- While trying to sell a house or car, you might discover that a lien has been placed on them, preventing the sale.
Unexpected IRS debts can happen to anybody, from the diligent filers to the cash-only people who never file to stay under the radar. If any of the above situations have happened to you, the next step is to contact the IRS to understand where the debt came from and how to address it.
In this article:
- Did you receive a notice from the IRS?
- How to check your IRS balance by yourself
- How to pay off your tax balance
- What interest and penalities will you be charged?
- How long do I have to pay off my tax balance?
Did you receive a notice from the IRS?
In most cases, awareness of IRS debts starts with receiving a notice in the mail.
One of the first notices you might receive is the CP-2000, Notice of Underreported Income. These notices are automatically generated when a filed tax return omits information on income that has been reported to the IRS from other sources. While this notice is not an official bill, it does offer the chance to either pay the debt immediately or contest the amounts assessed. These notices should be reviewed carefully to ensure that there are no associated deductions that could offset the underreported income.
The first attempt at collection usually comes in the form of a CP 501 notice- Notice of Tax Due. These notices will spell out the year in question, the amount of tax due, and the interest and penalties accumulated so far. They will also have a deadline for payment, after which the amount of interest and penalties will certainly be higher. CP-501 notices usually include a phone number to contact, though it may be hard to get through with current IRS staffing issues. At this point, the amount owed can be easily contested if taxpayers have evidence that the tax amount is incorrect.
If the deadline on the CP 501 passes without payment, a second notice, known as the CP 503 (or ten-day letter), will follow. This letter includes the current unpaid balance and more threatening language than the first one. If ignored, the CP 504 letter is issued, which is a notice of intent to levy. This notice demands immediate payment, or the IRS will begin collection actions that could include seizing tax refunds, social security payments, or wages, as well as putting liens on personal property such as houses and cars.
You may receive other IRS notices outside of the four mentioned above. These notices should be read carefully to understand the issue and what options you have for addressing it. If you receive a notice that you don’t understand, you should find someone that does. Consider reaching out to a credentialed tax professional or a tax lawyer who has expertise with IRS notices.
How to check your IRS balance yourself
The IRS keeps a balance sheet on every taxpayer for every year they file taxes or receive reported income. Having access to this information is key in staying on top of your tax situation before the notices ever arrive. But, how can you access this information? Here are the three options:
- Open an IRS online account. Online tax accounts are relatively new, but once set up, allow you to see your tax balance, any notices, reported income, refunds, economic stimulus payments, and more.
- Call the IRS directly at 1-800-829-1040. The IRS has a general helpline available from 7 AM to 7 PM from Monday through Friday. This line is staffed by IRS employees who can provide you with details on your tax account so long as you can prove your identity. The main problem with this option has been IRS staffing issues, which have prevented most callers from being able to get through. You could try calling other dedicated IRS phone lines found on certain IRS notices, but they seem to have the same staffing issues.
- Sign a power of attorney form 2848 to have a professional contact the IRS on your behalf. This approach typically includes Certified Public Accountants (CPAs), Attorneys, and Enrolled Agents, who are credentialed and authorized to practice before the IRS. With a power of attorney, these professionals can contact the IRS directly, either online or through a practitioner priority line, to get you the answers you need.
Which option is best?
Online accounts are the best way to check balances for those comfortable setting them up and storing passwords. To open an online account, you will need to go to IRS.gov and follow the prompts to sign in and create your account. The IRS uses a service called ID.me, which will eventually need to verify your identity using photos of yourself and your driver’s license or a 5- to 10-minute video chat with a live agent who will verify your identity. Once verified, you will have complete access to your account.
Calling the IRS is a good option for those who want to talk to an IRS professional to ask for help determining which is your best option for addressing the issue.
Hiring a tax professional is best for people who don’t understand their situation and are worried that they can’t fix it on their own. A professional can also handle communication with the IRS, saving you time from having to create accounts or wait on hold.
>> Read More: How to check your tax balance
How to pay off your tax balance
If you confirm that you have an outstanding tax balance with the IRS, you should reach out to the IRS immediately to figure out what your repayment options are. The longer you wait, the more interest and penalties you’ll owe on that unpaid debt.
If you make partial payments, those payments will be applied to the outstanding tax balance first, then to any interest or penalties.
Before paying any tax balance, make sure that the tax return for the year in question is correct and that you’ve taken every deduction and credit that you’re entitled to. Also, make sure to ask for penalty abatement to try and reduce the penalties that have already been assessed. The two most common penalty abatements are first-time penalty abatement (only available to those whose tax history for the last 3 years is clean and penalty-free), or reasonable cause penalty abatement (when an unforeseen disaster prevents you from filing or paying on time).
As for making the payments on your tax balance, it’s probably not a great idea to take out a loan to pay off an IRS debt because the interest on the loan would likely be higher than that on the debt. Paying as much as you can at tax time will make things easier down the road, but don’t pay so much to hamper your ability to handle other expenses and bills. Selling assets could make sense to help pay down the debt, as could taking money out of retirement funds, but be aware of the tax consequences of both to avoid making things even worse.
Short-term payment plans and installment agreements are the most popular ways to pay down an IRS balance over time. Both plans put taxpayers on a path to paying down their debts while minimizing penalties and eliminating IRS notices. Setting up the plans is fairly easy online, but once they are defaulted upon, they need to be reinstated or the notices and higher penalties will resume.
|Type of Plan||Balance||Setup Cost||Duration||Minimum Payment||Best for|
|Short Term Payment Plan||<$100,000||Free||6 months||None||Those who can pay the entire balance quickly|
|Online Payment Agreement- Direct Debit||<$50,000||$31 or free to low income||6 years||1/72 of current balance||Those who maintain a regular bank balance but need more time to pay|
|Online Payment Agreement- Active payments||<$50,000||$130 or $43 low income||6 years||1/72 of current balance||People who can’t pay but need more control over when payments happen|
What interest and penalties will you be charged?
Any unpaid tax debt to the IRS can result in interest and penalties. Here’s how these penalties are assessed:
- Interest rates on unpaid debt are the federal short-term rate plus 3% for most taxpayers. As of Spring 2022, that total is 4%. These rates compound daily and are likely to rise as interest rates increase.
- The three most common penalties are
- The estimated tax penalty. This penalty kicks in when you owe $1,000 or more at tax time. Taxpayers are expected to pay as they earn, and this penalty is automatically assessed when the return is filed, even if it is filed on time.
- The failure to file penalty. This penalty is added if a return is filed after the normal deadline or after the extended deadline if a proper extension is filed. It can add a penalty equal to 5% of the unpaid tax for each late month, up to a maximum of 25%, but there is also a set fee of at least $435 in 2022, or 100% of the tax owed for returns that are 60 days or more late.
- The failure to pay penalty. Late payments after the tax due date can accrue a penalty of 0.5% per month, up to a maximum of 25% of the total amount due.
How long do I have to pay off my tax balance?
The IRS has a ten-year statute of limitations on collecting tax debts. Ten years after the debt is first assessed, the remaining balance is wiped out and written off. But during those ten years, the IRS has the power to collect as much of that debt as it can, and its tools include liens on property, garnishing wages, and hiring private debt collectors. IRS debts usually cannot be discharged via bankruptcy, but debts deemed uncollectible can be negotiated downward via the offer in compromise option.
Offers in compromise allow taxpayers the chance to settle their tax debt for less than is owed if the IRS determines that it has become impossible to pay off within the 10-year period. There is a helpful pre-qualifier for people considering the OIC option at IRS.gov. This option has been abused by unscrupulous scam artists who prey on debtors with promises of reducing debts while charging hefty fees. Called OIC mills, the IRS has included them in its dirty dozen list of tax scams, and people should tread carefully when considering this option.
Once you have your IRS debt paid off, it’s a good practice to evaluate how that situation happened and make sure to make timely payroll deposits or estimated tax payments to avoid that situation again.
Author: Dan Connors