There are few letters that are more potentially frightening than one that comes from the Internal Revenue Service (IRS). While no one wants that “dreaded” IRS letter, the good news is that if you owe back taxes, often even if you owe a decent amount in back taxes, there are many ways to go about handling owing the IRS. However as with many things there is a definite right way and wrong way to approach this process.
Read on to learn the best steps to take so you can at least minimize the pain or frustration when dealing with your back-tax issues.
#1: Look At The Potential Amount Owed
This is going to be a major factor when it comes to what options you have moving forward, and it’s a really good indicator of just how much you will need (or not) Dean Hines Lawyer. There are a wide variety of tax calculators and free back tax calculators online that can give solid estimates on just how much you likely owe. This isn’t just based on income that you didn’t pay taxes on, but the type of income (employer, freelance, rent, investment, etc.), the tax rate for that income, the length of time since the taxes should have been paid, and the penalties that result from failure to file or failure to pay.
Having even a general idea of how much you may owe makes a huge difference, and if that total amount is well under $25,000 then barring extenuating circumstances, the IRS is required to allow you to attempt to setup a repayment plan to make up for the amount owed over time.
#2: Get An Experienced Tax Attorney
In most cases it is worth hiring a tax attorney even for just a few hours to get a clear view of what challenges lay ahead, what considerations can be made, and what abatements might be possible to help lower the full amount that you owe. This isn’t the type of situation where a general practice attorney is going to be just as effective. You genuinely need to look an attorney who specializes in tax law and who has experience dealing with the IRS on behalf of their clients.
Honestly the larger the amount owed (especially if there are charges of intentional under-reporting) the more you will need an attorney to protect you and help you through the process.
#3: Make First Contact, If Possible
This isn’t always going to be an option. Often times the first a business owner or individual learns that they owe taxes is when they get a letter from the Department of the Treasury informing them of the situation. However, in cases where you know you are going to owe taxes you (or your attorney) should set up first contact, if possible. This shows a clear effort to get a handle on the situation, to explain what happening & what challenges to payment is exist, and to set up the framework for repayment or a delay of payments until a better time depending on the situation.
Don’t be afraid. Generally speaking, the IRS is very eager to work with you to resolve things – this is not an inherently adversarial relationship. Reaching out is a great way to get the gears rolling and fix up the best possible deal for your situation.
#4: Failure To File Or Pay: Two Different Penalties
There are two common penalties that are applied to back taxes and it’s important to understand the difference between the two. Those two are:
– The failure to file penalty
– The failure to pay penalty
Even with payment plans there is going to be a failure to pay penalty, but that penalty is generally peanuts compared to a failure to file penalty. While these aren’t the only penalties that the IRS can apply on a tax payer (intentional evasion or intentional mis-reporting of information are bigger and serious charges/penalties, for example), unless you have a really extreme circumstance it’s failure to file and failure to pay that you’ll be dealing with.
As of 2018:
Failure to file penalty: 5% of unpaid taxes each month a return is late up to 25% of total unpaid tax owed.
Failure to pay penalty: 0.5% per month of your unpaid taxes. That’s it, although if you ignore it for 50 months it can stack up to 25% total of your unpaid taxes.
If you have both, which many do, the most that can be charged by both penalties combined is 5% per month. In other words, if there are issues it is still smart to file even if you can’t pay at the moment (of course if you’re years in arrears consult a tax attorney on this).
Pro Tip: While working with the IRS often simply asking for an abatement of any penalties can often result in the penalties being reduced and in some really special cases, even dismissed.
#5: Make An Appointment At A Local Office
Figuring things out via the Internet and mail can be difficult. If there are major snags along the way it can be really helpful to set up an appointment at a local office so you can meet with an IRS agent directly and they can help guide you through the process in a way that makes sense. In person visits are often the best way to work with a knowledgeable professional who can look at your account, dismiss some fees or penalties to lower the bill, set up a payment plan, or even give the right paperwork towards a deferred payment plan if that is a viable option considering the situation.
#6: Be Polite
Throughout the process whether you actually owe the taxes or not, always be polite. The old saying honey gets more flies than vinegar is true and think about all the customers IRS agents deal with. Not many of them are going to be happy. That is a stressful job in an agency that is severely under-funded on the staffing side. Being polite and friendly will make them far more open to working to get you a better deal so you can catch up on your back taxes.
Follow these six steps and you’ll find that dealing with back taxes & the IRS doesn’t have to be a scary thing.