Nobody wants to get behind on their taxes, but if you are unable to fulfill your tax obligation at the end of the year it’s important to know that you have options. When the Internal Revenue Service (IRS) determines you owe money, it assesses you a tax. This happens either when you file a tax return or when you do not pay your full balance.
Sometimes the IRS assesses your taxes after an audit in which it does not agree with portions of the tax return, most often because you miscalculated the amount owed. The IRS has 10 years from the date of assessment to collect the taxes owed, although you may be able to extend the statute of limitations.
If the IRS determines that you owe the government money, you will receive a notice of assessment that asks you to pay your tax bill. If you fail to pay it within 30 days, you will receive another notice. If you still do not pay, you will continue receiving these notices until you finally receive a Final Intent to Levy notice. This notice tells you that the IRS is issuing a levy against your state tax refund because you have a balance due.
If you do not immediately pay this amount or appeal the amount of taxes that you owe, the IRS will begin searching for other assets on which to place a levy. The IRS will likely place a lien against you. This means it can legally seize your property to satisfy your debt by garnishing your wages, levying your bank accounts or taking other measures.
Below are three options to resolve your tax debt and avoid a lien or levy from the IRS.
Establish an installment arrangement
The most common way to address your tax debt is to ask for an installment arrangement. This is a repayment plan for up to 72 months or until your tax debt is paid off. You can file a Form 9465 with the IRS to request an installment arrangement.
Be aware that penalties and interest accrue while you pay off the debt. It is better to take larger payments over a shorter span than 72 months to eliminate your balance.
One term of the installment arrangement is that you promise to file your tax returns and pay any associated debts on time. Failure to do so will nullify your agreement. An installment arrangement also extends the statute of limitations for the IRS to collect on your debt by two years.
Receiving ‘Currently Non-Collectible’ Status
If you are granted currently non-collectible (CNC) status, all IRS collection actions will stop. For example, the agency will not be allowed to file a lien against you.
You may qualify for CNC status if paying your tax debt would leave you with not enough money to cover your basic needs. Most often, debtors must be out of work or underemployed to be considered CNC. While you are on CNC, the statute continues to run.
CNC status is temporary and the IRS reviews your case every year. If you become ineligible, you will have to make other arrangements to satisfy your tax debt.
Providing an offer in compromise
Depending on your financial circumstances, the IRS might settle your tax debt for less than you owe. This is known as an Offer in Compromise (OIC).
To file for an Offer in Compromise, you file Form 656, which includes Form 433-A (OIC). These forms require you to list all of your assets, including: bank, retirement or brokerage accounts, your home and automobiles and any other assets. It also requires you to list all of your liabilities, income and expenses.
It takes between six months and one year for the IRS to accept OICs. If you request an OIC, your statute of limitations is extended by the amount of time the IRS considers your offer. The IRS offers an online pre-qualifier tool that can give you a better idea of whether or not your offer will be accepted.
If your OIC is accepted, you will pay the amount you proposed in a lump sum or installments. If your offer is denied, the IRS will move to forcibly collect the debt.
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