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 are unable to pay the outstanding balance, it is sometimes wise to take out a loan to pay the bill in full rather than making installment payments to the IRS. This is because acceptable Installment Agreements (AI) require approval. Often times, what the IRS approves could exceed your ability to pay. Any amount sent will be deducted from your balance, however you could still be vulnerable to collection enforcement actions.
The Internal Revenue Service (IRS) is the most powerful collection agency in the world. Often times, taxpayers who owe taxes find themselves in difficult situations due to the harsh tactics used to collect. The IRS can garnish your bank account, wages, investments, 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 may not be able to pay their tax liability. The bad news is that a large percentage of taxpayers who owe make the biggest mistake of all. They do not respect the IRS rather than fear them.
As such, the first thing to do is not to ignore any notices you receive. Most notices give you the opportunity to respond or get additional time to respond if necessary. Next, schedule a consultation with a licensed tax professional. Licensed tax professionals have demonstrated their ability to understand how to apply the rules governing various tax scenarios and compliance issues.
Another important step is to review the tax returns from which you derived your tax liability. Simple mistakes, like claiming income or deductions twice, can cause you to miss eligible deductions or increase your tax liability. This could easily be corrected by submitting an amendment.
If your liability is due to underpayment and you are a W-2 employee, make changes to the withholding amount to ensure you don’t create another tax bill in the future. If you are an independent contractor receiving 1099s, be sure to make estimated tax payments in the future. This will show that you have not only corrected the problem, but that you plan to comply with the rules in the future.
Also, ask how to minimize penalties and interest. Having a tax liability can be challenging enough without additional assessments that could increase your tax bill significantly. You may qualify for exceptions to underpayment of tax penalties or penalty reduction.
Finally, don’t panic. If you respond reasonably to the notices and are honest with the IRS, they are not bad creditors to deal with. If all else fails and you cannot afford professional assistance, contact your local taxpayer advocate. You may qualify for free assistance.