The consequences for not paying your taxes have varied pretty wildly over the last century in the United States. Tax evaders were once incarcerated for fairly low level tax delinquencies, but on the other end of the spectrum, hundreds of thousands of dollars of debt are sometimes just wiped clean if they’re not collected within a 10 year statute of limitations. It is the ambiguity about the tax collection process that scares people and leads them to spend thousands of dollars retaining attorney’s, CPAs or Enrolled Agents to aid with tax resolution.
As an Enrolled Agent who has assisted hundreds of people resolve their tax debt, I can confidently say that unless you are dealing with complex issues, a business debt, or you just don’t have a lot of time, you can handle your tax issues without professional representation. We already covered, 5 Steps to Resolving Tax Debt (and When You Need Help) but here I want to detail the tax collection process specifically and what you can do to mitigate your tax debt before it gets out of control.
The following should not be construed as formal tax advice and does not suggest the avoidance of filing or paying taxes.
Stage One: Receiving letters from the IRS or state revenue department
The first step that the Internal Revenue Service or state taxing authorities take when you don’t pay your taxes or there is an error on your return, is to calculate your deficiency and let you know about it through a series of letters. The first letter details the amount that you supposedly owe, including applied penalties and interest. At this point, the taxing authorities can’t yet begin the devastating steps of seizing your wages, bank accounts or property to satisfy the debt, but it’s important to note that penalties and interest continue to accrue until the debt is resolved. This is some of the worst debt you can have too, combined penalty and interest from back taxes easily surpasses even the worst credit card rates. Also, a lien probably can be filed immediately but might not be unless the debt is significant – more on that later.
What can you do when you first start receiving tax letters?
- Accept or contest the taxing authorities assessment
When you receive your first letter you are typically given a window of time to respond before further penalties and interest accrue. This is your opportunity to review the assessment and decide whether to accept it or fight it. This first letter may contain very little information on how the amount owed was calculated so if you want answers it’s probably best to give them a call. If you are contesting the debt, in my opinion it’s best to also write a letter clearly detailing why you disagree with the findings and deliver it via certified mail to the address on the initial notice. - If you accept the assessment you should pay-in-full or set up a payment plan as soon as possible
If you agree with the amount due, the best course of action is to just pay it off immediately, even if that means taking out a loan, or using credit cards. Tax debt is more expensive than virtually all other types of debt as penalties and interest can add up to 50% of the total amount owed overtime! If you cannot afford to pay the whole amount, you can usually set up a payment plan. I won’t go into how that’s accomplished here, we covered that in our previous article linked above, but understand that interest continues to accrue, albeit at a much slower rate, while you are repaying your debt in installments.
Stage Two: A lien is filed and wage garnishment /a levy is threatened
What is a lien?
A tax lien is a legal document that keeps you from profiting from the sale of property until your taxes are paid. Tax liens are sometimes subordinate to mortgages, meaning that if you try to sell your house first the mortgage gets paid off and then any remaining proceeds are sent to the IRS or state before you can take your cut. That’s if you are even able to sell property with a lien attached to it. You can also subordinate a lien in order to attempt to sell a property so that you can cover your tax debt.
The taxing authorities can typically apply a tax lien when you owe any amount in back taxes, but in my experience they don’t typically file a lien unless you owe more than a couple thousand dollars to the state, or $10,000 if it’s the IRS. If you’re not planning to sell property the lien itself is fairly innocuous, though it does hurt your credit.
What is a levy?
A levy is when the taxing authorities literally wipe your accounts clean to satisfy your debt. After you receive a lot of letters, you will eventually receive one that looks exactly like the others but provides you with an important opportunity to resolve your debt before a bank levy is issued. This letter is usually titled something like, “Final Notice if Intent to Levy” and you should read it very carefully. A bank levy or wage garnishment is the last thing you want when you’re at the grocery store.
Stage Three: The IRS levies your accounts, garnishes your wages
If you ignore all correspondence and take no action for several months, you will eventually experience a bank levy and/or your wages will be garnished. This was, unfortunately, the point that most of my previous tax debt clients would hire me. However there are still important steps that can be taken to stop levies and modify garnishments once they are issued.
The most important actions to take when you have an IRS levy are:
- Complete a financial statement
If an IRS levy is creating a financial hardship you need a way to prove it fast. Thankfully the IRS and state taxing departments provide a financial form that allows you to demonstrate your income and assets so that you can prove that the levy is creating a hardship. Completing Form 433-F is usually good enough but there is also a more detailed Form 433-A that might help you paint a more accurate picture of your financial situation. You should also attach supporting documentation such as three months of your wage statements, bank statements and anything else that supports the figures used on the form.
Don’t leave out any property, income or expenses on this form and make sure you represent your financial status as accurately as possible. If recent wage statements have been higher than usual, use six to twelve months of records to show what you really bring home on average. Remember, your repayment plan needs to allow for the payment of all necessary living expenses. If you can show that you have no money after necessary living expenses, you may be able to demonstrate that you are “currently not collectible,” and the IRS will leave you alone. Until you start earning an income that is. Though in this scenario you will have to start paying as soon as it becomes feasible, I have literally watched thousands of dollars of debt expire when the IRS cannot collect them within their statute of limitations (generally 10 years). - Contact the revenue agent and immediately offer a reasonable resolution based on your financial status
You don’t want to be sending letters at this point because time is of the essence. So, call the IRS or state taxing authority and find out the name of the agent who issued the levy or wage garnishment. You will be given this agent’s phone number and you will want to call immediately to ask them where you can deliver your financial statement, proposal for resolution and payment plan paperwork (which you can usually find online and complete before even contacting the revenue officer). - File an appeal
If you are not getting anywhere with the agent you can usually appeal the process, if that opportunity hasn’t elapsed, which can buy you time to raise money to pay off your debt, or hire a professional.
Stage Four: Property seizures, criminal action?
I never handled a case where criminal action was underway. only 0.002% of all taxpayers face criminal charges each year. In those instances fraud is usually involved, or else extremely high debts and you need to retain an attorney. I did witness a few property seizures, however, and it’s not pretty. It’s hard to believe that a case can get to this point given the amount of chances, literally years of chances sometimes, that taxpayers are provided to resolve debt. But it happens all the time.
At this juncture, it might be wise to consider filing for bankruptcy. But be careful, not all bankruptcy filings discharge tax debt, so speak with a qualified bankruptcy attorney to determine your options. Even though filing for bankruptcy can hinder your financial situation for decades, if you’re at this point, you’ve probably already done that so it might be best to draw the line and attempt to start over.