Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Apr 1

    Each year, more than 26 million people – about 1 in 6 – show a balance due on their tax return. Many of those people can’t pay the amount due all at once. Here are 15 things you need to know about IRS collections before and after you file.

    1. File the return before the due date. I know it may not seem like the thing to do – after all, why tell the IRS you owe them money before you can pay it? It’s tempting to ignore the problem and just not file. But that would only make matters worse. Not filing can mean a very expensive failure-to-file penalty that can add 25% to the balance due. Remember also, an extension is an extension of the time to file, NOT an extension of the time to pay.
    2. The IRS has 10 years to collect. The law grants the IRS a 10-year statute of limitations to collect taxes. For this reason, they are reluctant to agree to payment arrangements that don’t pay the tax owed during that time, or, if they do, are going to require detailed financial statements and other documentation to prove you don’t have the assets or income to pay the debt.
    3. Set up a payment agreement with the IRS. Depending on the circumstances, the IRS can and will file a tax lien to collect money you owe but haven’t paid. The only way to avoid this enforced collection action is to get a payment agreement in place.
    4. There are options available. There are several types of payment agreements with the IRS. The installment agreement is the most common, but it’s also possible to get an extension of up to 120 days just for the asking. In hardship situations, (as determined by the IRS) the IRS may defer collection of your balance under their “currently not collectible” program, or, in rarer circumstances, settle your debt for less than the amount you owe (called an Offer in Compromise).
    5. Most agreements can be made online at IRS.gov. There have been improvements to the online payment arrangement tools at www.IRS.gov. In fact, usage quadrupled in 2015 over 2014. That’s probably because it’s a whole lot easier, and quicker, to do it online than waiting on the phone, or heaven forbid, the U.S. mail.
    6. Some agreements come with a federal tax lien. Extensions to pay and installment agreements are, if set up before the IRS begins collection activity, a sure-fire way to avoid a tax lien. However, if you owe more than $50,000 or you owe more than $410,000 and can’t pay within six years, the IRS will usually file a tax lien. Once the balance is paid off, you can have the lien removed.
    7. You must file all required returns to establish an IRS agreement. Before the IRS enters into an agreement it will require all tax returns for the past six years to be filed. You won’t get one without it.
    8. Use the streamlined installment agreement to get the best terms. The streamlined installment agreement usually comes with the best terms. With balances less than $50,000, you can make equal monthly payments for up to 72 months. If you owe more than that, the IRS will determine the payment based on your income and IRS-allowed expenses. This can create a much higher monthly payment.
    9. Set up direct debit to avoid default. Missed payments result in ugly letters from the IRS, additional fees to reinstate the installment agreement, or, worst case scenario, the installment agreement becoming immediately due and payable. Taxpayers who pay by check are three times more likely to default on their agreement. Direct debit agreements also have a lower set up fee, $52 versus the $120 fee for payment by check.
    10. Avoid defaulting on the agreement. Default can occur when you have a balance due the next year that you don’t have the money to pay. This often occurs because the taxpayer hasn’t made the necessary estimated tax payments or need to increase their withholding. The IRS will charge you a $50 reinstatement fee.
    11. You won’t get any refunds until the balance is paid in full. The IRS will always take any future overpayments and apply them to the installment agreement. Enough said?
    12. Interest and penalties continue as long as the agreement is in place. The IRS currently charges a 3% interest rate on underpayments. Even with an installment agreement, the failure-to-pay penalty is 0.25% per month, or 3% per year. So, in addition to the set up fee, the cost of an installment agreement is about 6% of the balance owed per year.
    13. Don’t forget to request penalty abatement. Failure-to-pay penalties have continued to accrue for the life of the installment agreement. Towards the end of the agreement, if you have a clean three-year compliance history, you can use the first-time abatement procedures to request a forgiveness of the penalties paid for one tax period.
    14. No agreement may mean no passport. Congress passed a law in late 2015 that allows the U. S. State Department to revoke or deny passports to those who owe more than $50,000 to the IRS, and are not in a payment agreement.
    15. An offer-in-compromise may be possible in desperate circumstances. Offers-in-compromise are an over publicized by late night TV arrangement where the IRS forgives some portion of your tax debt. In my experience, they loathe to do it. Their first position is always that you have some assets you can sell, or you have the ability to earn some money in the future that belongs to them. Nevertheless, if you are one of the unfortunate, rare individuals that fit the IRS criteria, you shouldn’t ignore this avenue.

    It’s not unusual for a taxpayer to file and owe. If you owe the IRS and can’t pay, you can look to us for help.