If you do not pay in full when you file your taxes, you will receive a bill notice from the IRS. This bill begins the collection process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax, for example if the collection period has expired. The first notice you receive will be a bill that explains the balance due and demands payment in full. It will include the amount of the tax, plus any accrued penalties and interest, which will continue to accrue.
If you cannot full pay the balance, you may qualify for a payment plan known as an Installment Agreement. Different options are available. Sometimes, a taxpayer can request or negotiate an Installment Agreement on their own. Other times, it can be important to hire a tax professional. Note that there is a user fee to set up an installment agreement and interest and penalties will continue to accrue while you are making payments.
If you are unable to pay in full with a payment plan, you may apply for an Offer in Compromise, which resolves your tax liability by payment of a reduced amount. To begin this process, you must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if you are a business owner with employees. Note that you have to meet the terms of the offer such as staying in tax compliance for a period of time after the offer is accepted. The Offer in Compromise is formulaic or objective and is not like negotiating a lump sum settlement of a credit card. Sometimes, an Offer in Compromise is an option to give a taxpayer a “fresh start”. Other times, it causes more harm and creates delays.
See our other blog posts for other options such as discharging taxes in Bankruptcy, Currently Not Collectible status, or allowing the Collection Statute Expiration Date to expire.
It can be critically important to strategize with a tax professional to come up with a “game plan” and address concerns of enforced collection actions by the IRS such as:
- The IRS may file a Notice of Federal Tax Lien in the public record to notify your creditors of your tax debt.
- The IRS may levy assets such as wages, bank accounts, social security benefits, and retirement income.
- The IRS may seize your property (including your car, boat, or real estate) and sell the property to satisfy the tax debt.
- The IRS may seize future federal tax refunds or state income tax refunds that you are due and apply them to your federal tax liability.