Editors' pick: Originally published March 17.
Unpaid taxes are a big problem for the Internal Revenue Service, and if they find you're one of those delinquents not paying, the agency will make big problems for you, too.
While data varies on the topic, one study from the IRS says that the federal government loses $385 billion, while other reports state that the number is closer to $600 billion, in unpaid taxes each year.
Even to the U.S. government, $600 billion is a lot of money, and that's why they'll send the IRS after citizens who don't pay up, or who come up short on the amount of taxes they owe Uncle Sam.
That's where an IRS "back taxes" letter enters the picture, which comes chock full of fines, interest and penalties that come part and parcel with owing the IRS money.
If you receive a letter from the IRS stating you owe back taxes, experts say to take it very seriously, and to take the following steps to rectify the problem:
Be prompt in responding - The worst mistake you can make when it comes to back taxes is continuing to delay a solution, notes Jayson Mullin, owner and founder of Top Tax Defenders in Houston. "The IRS will not simply forget your tax situation and move on, and the longer it goes on the more serious the situation becomes," Mullin says. "In fact, you could see your wages garnished or bank levies if you don't attempt resolution."
Start accumulating research (and get good help) - "Document everything to the best of your ability," Mullin adds. "Make notes of all of the interactions you have and ask for the name of the person you are dealing with. Any agreement reached should be well-documented and in writing." On that front, Mullins strongly advises seeking professional help, especially if your tax debt is more than ten thousand dollars. "Tax laws are constantly changing and it can be hard for the general public to keep up," he says. "Tax lawyers and professionals can make sure you are up to date on the laws and regulations and try to submit helpful solutions like offers in compromise and payment plans."
Look for help in the right places - Working with a trusted tax professional, look for gaps and loopholes that can curb your IRS debt. "Depending on your issue, there may be some federal or state amnesty-type programs available to you, and there may be a limit to the number of years you need to file and pay," says Abby Eisenkraft, owner of Choice Tax Solutions in Melville, N.Y.
Be honest and straight with the IRS - "Don't lie or omit income," Eisenkraft adds. "You're already on their radar, and the last thing you want is for your case to be referred criminally within the IRS, if it appears you are intentionally hiding income." Keep as calm as possible if and when you interact with the IRS - they're human beings, too, and can act accordingly if you're hostile or angry. "Don't be rude or unpleasant," says Eva Rosenberg, founder of the website, TaxMama.com. "That will come back to bite you later on."
Respond carefully and thoroughly - If you understand the IRS's position and you're confident that you can demonstrate why the agency is wrong, write a letter and include your proof in support of your position and a copy of the IRS notice, says Steven E. Warren, CPA and senior manager at Schechter Dokken Kanter CPAs in Minneapolis-St. Paul, Minn. Warren says if the amount owe is small, you're likely "better off" by just sending the IRS a check. You can try to work things out over the phone, too. "Your IRS response notice will have a phone number on it that you can call in hope of taking action as soon as possible," Warren states. "But it's not uncommon to be placed on hold for a very long time before reaching a person who may need to transfer you and put you on hold for additional time."
Work out for a settlement - If you have already filed your tax refund but find yourself unable to pay, reach out, says Josh Zimmelman, president of Westwood Tax & Consulting LLC, in Rockville Center, N.Y. "The IRS may be open to a tax settlement, but you have to communicate with them in order to make this happen," he advises. "If you haven't filed all of your past returns, you will have to do so before the IRS will be willing to negotiate." After that, Zimmelman says, the IRS may allow you more time to pay your balance. "They may agree to an installment plan, in which you can pay small amounts every month instead of one lump sum," he says. "If you can prove that you cannot afford to pay your taxes, the IRS may be willing to make a compromise and reduce your balance."
Know how a back taxes payment agreement works - T. Joshua Wu, a partner at Greaves/Wu LLP in Washington, D.C., describes in detail how a payment plan would work. "As part of the installment agreement process, the IRS examines the taxpayer's income and expenses," Wu states. "The IRS considers the excess of income over the taxpayer's ordinary and necessary expenses to be available for payment under the installment agreement." Taxpayers may file Form 9465 or complete an Online Payment Agreement through the IRS's website to apply for an installment agreement, he adds. "In most cases, taxpayers are required to supply significant financial information to the IRS via Form 433-A (individuals), Form 433-F (individuals with tax liability less than $250,000) or Form 433-B (businesses)," Wu says. For taxpayers with lower amounts due there are special installment agreement rules, Wu says. "For those with a liability of $10,000 or less, who have complied with their tax obligations for the last five years, and are able to pay the liability over three years, the IRS provides guaranteed installment agreements," he adds. "Further, for taxpayers with less than $50,000 due, who can full pay within 72 months or before the statute of limitations on collection expires, there is a streamlined process with no financial disclosure."
You can negotiate - Taxpayers should also consider whether they might qualify for an offer in compromise, states Wu. "This is an agreement between the taxpayer and IRS to settle a tax liability for less than the full amount," he says. "There are several types of offers and different factors that contribute to acceptance for each." Talk with a tax professional if you go that route, Wu advises.
Consider a credit card payment - If all else fails and you must pay your tax balance in full, you might consider paying with a credit card, Zimmelman says. "Even though you might end up paying interest charges on your credit card balance, depending on your rate, that might still be cheaper than paying the IRS's fines and interest charges," he says.
Facing a back taxes issue is a serious matter. As the experts above attest, ignoring the problem will only make the problem much, much worse, and will likely lead to larger fines and penalties, and even to tax liens against your homes and wage garnishments directly from your paycheck.
Don't go down that road. Reach out, get help, and address your back taxes problem as soon as possible. Like a dog on a bone, the IRS is aggressive about getting all the tax money owed to the federal government.
You'll need to be equally aggressive in making the problem disappear - a scenario that is definitely in your best interests in a back taxes situation.