Few things can give us instant stress quite like finding out we owe back taxes.
Some fear of the IRS owes to the level of power the bureaucracy can wield. Unlike other creditors, the IRS can reach right into your bank account and take out a payment if it comes to that. An organization as large as the IRS can also be difficult to talk to and slow to respond.
On the other hand, the IRS can be practical and at times even forgiving. You may find individual agents to be extremely helpful. The law is often on your side in dealing with the IRS as well. The Taxpayer Bill of Rights, passed in 1996, gives you increased protection.
In fact, if you need help with back taxes, one place you can go for help is the IRS itself.
Ask the IRS for an abatement of penalties
Before you start paying back taxes, see if you can have the total bill reduced. It can't hurt to ask. If you're far behind, a large portion of your balance may be penalties -- and interest on those penalties. Try to get the penalties reduced or removed. The IRS often reduces penalties for various reasons, especially if it means the underlying tax will be paid and they can close the case.
Write a letter explaining why you think the penalty should be removed, or "abated." There is no IRS form to use for requesting an abatement. You can specifically ask for abatement of the penalty in the letter you write. If you are behind, you probably have a reason, whether it was ignorance of the debt, unemployment, hospitalization, or the fault of a business partner or ex-spouse.
Your chances of having a penalty abated are better if you haven't asked for an abatement for the same offense before.
Request an Installment Agreement
If you simply need more time to pay your back taxes, an installment agreement may keep you out of trouble and provide the time you need. File "Form 9465, Installment Agreement Request."
The IRS must let you make installment payments if you meet all the following requirements:
- You owe $10,000 or less in back taxes, not including penalties or interest. The IRS may allow an installment agreement for amounts over $10,000 if you show you can make the payments.
- You show the IRS that you cannot pay the entire tax when it is due.
- You will pay off the tax within three years under the installment agreement.
- You agree to comply with the tax laws while your agreement is in effect.
- During the past five years, you (or your spouse, if you file jointly) have not failed to file or pay your taxes, and you haven't had another installment agreement with the IRS.
Paying on an installment plan doesn't get you out of all penalties and fees, but it does stop the unpleasant letters and collection efforts. You may have to pay a fee to set up the plan, plus interest on the past due taxes. Plus, you may still owe a penalty for late payment.
You should always pay as much as you can before you request an installment agreement, and then pay the back taxes as quickly as you can without jeopardizing your other financial needs.
Get help with disputed back taxes
If you don't understand your bill for back taxes, or if you think the IRS bill is wrong, don't pay the tax until your issues are resolved. The IRS can make a mistake, or the information sent to them may be missing or in error. If you pay a disputed amount, you may find it difficult or time-consuming to get your money back.
Of course, don't put off resolving a tax issue or ignore it just because you think the IRS is wrong. Those penalties and interest expenses are costly.
If the bill is wrong, write a letter and explain the situation if you can. You are usually better off writing a letter than calling for all but the simplest problems. It's usually faster than waiting on hold, plus you'll have a written record of what you and the IRS said.
If a tax professional prepared your return for the year in question, you may want to have that professional write a letter on your behalf. He or she already understands your case and has your information and working papers.
You must use old-fashioned paper and an envelope to write to the IRS. The IRS does not communicate with taxpayers via email.
Get professional help if the IRS is in the collection stage
If your problem is serious enough that the IRS is talking about seizing assets and you owe a significant amount of money, you're probably past the do-it-yourself stage. The IRS will remove money from bank accounts and take other drastic measures if it threatens to. Such actions can disrupt your finances and cause you real harm.
You are allowed to file an appeal to stop the collection process. Consider hiring a CPA, tax lawyer, or other tax professional who is experienced in dealing with IRS problems.
Request an offer in compromise
The last resort for getting help with back taxes is an "offer in compromise" (OIC). An OIC is the tax equivalent of debt negotiation, with some similarities to bankruptcy. It's not to be entered into lightly.
With an offer in compromise, you offer the IRS an amount less than your current balance of back taxes and hope they accept it. You will need to offer at least as much as your "reasonable collection potential" -- that's the value of everything you own, plus your expected future income less basic living expenses.