April 18 has come and gone, but many taxpayers are facing a large tax bill that they aren’t able to pay. But there are steps they can take to work with the International Revenue Service to develop a payment plan.
Continue Reading Below
After the IRS has made an assessment on what you owe, you have 10 days to pay it in full or be subject to collection action.
Although an account is technically considered delinquent after 10 days, no one will show up at your door on the eleventh day. A series of threatening notices will be mailed to you, and eventually you will be contacted in person by a revenue officer.
What Power Does the IRS Have?
Dealing with the IRS is different than dealing with other debt collectors. Unlike other creditors that have to go to court to obtain a judgment against you and then go back to court to have that judgment enforced, the IRS doesn’t. The agency is vested with the power to seize your property without a court order; the only requirement is that it has a valid assessment, give notice with a demand for payment (which has to be sent to your last known address) and give notice of intent to seize.
In addition to seizing your property, the IRS can also place a levy on your bank accounts and on your salary. This means that both your bank and your employer must turn over all funds being held for you to the extent of the levy. (Note: Special rules apply to levies against salary.)
Certain types of property are exempt by law from levy including:
1. Apparel and schoolbooks (expensive items of apparel such as furs are luxuries and are not exempt from levy);
2. Fuel, provisions, furniture, and personal effects, not to exceed $1,500 in value (for the head of household);
3. Books and tools used in your trade, business or profession, not to exceed $1,000 in value;
4. Unemployment benefits;
5. Undelivered mail;
6. Certain annuity and pension payments (including Social Security benefits);
7. Workers’ compensation;
8. Salary, wages or other income subject to a prior judgment for court ordered child support payments;
9. A minimum amount of wages, salary, and other income - $75 per week - plus an additional $25 for each legal dependent.
The IRS has been seizing personal residences more frequently in recent years. After a “notice of seizure” is placed on the front door of your house, you have 10 days to come up with the owed money, or there is an excellent chance your home will be sold at auction to satisfy the tax bill. You can redeem the house at any time within 180 days after the sale by paying the purchaser the amount paid for the property plus interest; by law, the purchaser must sell.
The IRS cannot put you in jail because you owe money, even if the debt has been outstanding for years, unless you fraudulently conceal your assets or otherwise conspire to beat the government out of its money. No crime has been committed merely because you cannot afford to pay your taxes.
But don’t burry your head in the sand if you can’t pay your tax bill, respond immediately to all notices sent requesting payment and make every attempt to speak to someone at the IRS and follow up the conversation with a confirmation letter.
Depending upon your circumstances, the IRS may be willing to enter into an installment agreement for payment of the outstanding taxes. Usually, such a partial-payment agreement requires a down payment, followed by monthly payments over a year or 18 months. If you fail to comply with the terms of the partial-payments agreement, which also requires that all current taxes be paid on time, the agreement becomes void and your property is then subject to levy seizure.
The beginning of the collection process is the best time to try to get the IRS to offer you an installment agreement. If you have ignored the IRS’ attempts to work out an arrangement and you now have a “notice of seizure” on your door, it is extremely unlikely that the agency will create a partial payment agreement with you.
How to Negotiate with the IRS
The first step in negotiating a settlement of taxes owed is to provide the IRS with a current financial statement. Without a statement verifying your financial situation, the IRS will not even consider a settlement. If you don’t want the IRS to know about certain assets, don’t furnish the financial statement, it is better to offer no statement than offer one that is misleading or fraudulent.
If the IRS already knows about all of your assets, and there is no disadvantage in providing a financial statement, then go ahead and submit the statement. The IRS will be interested in knowing how much money you receive each month, and how and where it is being spent. When you complete the personal living expense portion of the form, it is generally a good idea to arrange for some money to be left over each month to pay taxes. The IRS is more inclined to go along with a partial payment offer if it feels confident there is money available to make the agreement work.
If you have no assets and no income, there is nothing the IRS can levy. If you are in this predicament, the agency does provide an opportunity to discuss an “offer in compromise,” which is a little publicized procedure where the IRS will accept a one-time payment of as little as 10 cents for each $1 owed.
If IRS officials think they will receive more money from you in the long run by entering into an offer in compromise than a collateral agreement, (an agreement whereby you agree to pay a certain percentage of your income for five to 10 years), it may agree to the compromise.
The best chance of successfully agreeing to an offer in compromise is when the tax debt has been on the books for a number of years. The IRS must be convinced that conventional collection procedures will not work, so don’t expect a relatively-recent tax obligation to be settled this way.
However, if the IRS has had a chance to collect and has not succeeded, it is likely to accept your compromise offer.
Family Finance Expert, Princess Clark-Wendel, holds an MBA from the University of Chicago and is the author of A Pocketbook of Hope in Tough Economic Times. Ms Clark-Wendel is an international business consultant and financial advisor who has held management roles in two Fortune 100 companies.