What would you do if you receive a letter from the IRS stating you owe taxes?
Andy Magnus, ex-IRS Agent and long-time CPA, says “If you receive a letter from the IRS stating you owe taxes and they are trying to collect, your first responsibility is to verify that you do actually owe. If you weren’t expecting the letter then it may have been sent in error.”
You can listen to Andy and I discuss IRS Collections here -> [18:33]
I Owe Taxes to the IRS. What Do I Do?
Assuming you do have a deficit and just can't pay the tax bill, what can you expect? Andy provides us with actionable steps on how to proceed.
Keep in mind, “We don’t have a Debtor’s Prison in the United States“. Andy also reminds us “Keep a cool head: If you owe taxes, the #IRS can’t eat you and they can’t take away your birthdayClick To Tweet”. Keep a cool head: If you owe taxes, the #IRS can’t eat you and they can’t take away your birthdayClick To Tweet
Proceed by setting up an installment agreement. This allows you to work off the debt over a period of time. Contact the IRS or a tax professional to work out a payment plan.
Taxes first, unsecured debts last
The goal of the IRS is to get the back taxes paid, prevent it from getting worse, and keep you current. However, there are situations where people lost a job, became disabled, etc. and simply can not pay.
There is a process you can go through if you find yourself in a “currently not collectible status”.
The IRS will make the determination what you can pay by looking at how much you earn, your expenses, and if there is anything left over to pay the IRS.
It is important to note the IRS does not take into account unsecured debt like credit cards, so their calculation may put you in a pinch with your creditors.
Whatever the situation, income taxes are not to be ignored. In many cases, I instruct my coaching clients to pay back taxes first, then begin to tackle their consumer debts following the Debt Snowball Method.
Insolvency and Offer In Compromise (OIC)
This is an option to work out with the IRS if you simply do not have the ability or the assets available to pay your taxes. It is not as easy as late night TV makes it appear to be.
Most importantly from this discussion: Even if you don’t have the money to pay, file anyway. Failing to file on time or to file an extension triggers the failure to file penalty. This equates to 5% per month for the first months. This is different than a failure to pay penalty, which is .5% per month.
Don't Let Income Tax Collections Happen To You
Be proactive. You have options and there is time to address the situation.
Don't let income tax collections happen to you:
- File your tax returns on time, even if you can't pay
- Work with a Financial Coach to help find the money to pay IRS debt
- Contact a tax professional like Andy Magnus or the IRS to set up a payment plan