5 Tips for People Who Owe Taxes
What To Do If You Owe Money to the IRS
If you owe taxes, it may feel as though you’ve been cast adrift upon a sea of uncaring bureaucracy. Don’t despair—you have rights! In fact, there is a new “Taxpayer Bill of Rights” that was recently adopted by the IRS. Here are some guidelines to help you find your way safely back to shore.
Tax Tip #1
If at all possible, you should try to pay the owed amount on time and in full. This will avoid costly interest and penalties. Once such penalties accrue, it can be very difficult, if not impossible, to convince the IRS to abate them.
Tax Tip #2
You have the right to provide more information to the IRS if you can substantiate your claim that you owe less tax or have a basis for penalty relief. (There are very specific, qualified reasons for penalty relief, including illness or military service.) The right to provide more information is particularly useful if the IRS prepared your tax returns, with or without your direct involvement, such as may occur for long-term non-filers. Understandably, when the IRS decides to complete tax returns for longtime non-filers, they aren’t going to be aware of all the possible deductions or credits you may be entitled to claim. In fact, the standard procedure is for the IRS to prepare your tax returns using the standard deduction, no dependency exemptions, no credits, and using “married filing separate” filing status for married taxpayers. This procedure typically results in a tax liability much higher than warranted, and has the desired effect of forcing the non-filing taxpayer to file a correct return and get back into compliance.
Tax Tip #3
You can negotiate a repayment schedule; however, interest and penalties continue to accrue during the repayment period. Warning: the IRS is very intolerant about late payments once a repayment agreement has been negotiated. As a rule, even one late or missed payment defaults a repayment agreement, and you will have to start over to resolve your problem. In addition, the IRS will now view you as unreliable when you attempt to negotiate a new repayment schedule. For more information, see "Online Payment Agreements."
Tax Tip #4
If you owe taxes because of noncompliance by your spouse, you may be eligible for “Innocent Spouse Relief.” IRS Publication 972 and Form 8857 will give you more information about whether you may be eligible for relief from joint liability arising, for example, from unreported income your spouse neglected to mention.
Tax Tip #5
Perhaps, most importantly, you have the right to competent representation. This means that in some cases your best option for saving money will be to hire a qualified professional to argue your case for you. For the most highly qualified professionals, it would be best to check with your state or local CPA society and then inquire about specialists who deal with the IRS regularly. Alternatively, you may wish to contact your state or local bar association for a similarly credentialed tax attorney. If you cannot afford a professional tax representative, you may qualify for the pro bono services of a Low Income Taxpayer Clinic (LITC). Such clinics are independent of the IRS, although they do receive some of their funding from an IRS grant program. An LITC can help you with anything from representation in an audit to resolving problems with your account. For further information about Low Income Taxpayer Clinics, and how to find one in your area, see: www.irs.gov/Advocate/Low-Income-Taxpayer-Clinics.
Finally, don’t assume that your strategy for dealing with the IRS will work for any state taxes you may owe. Federal and state tax regulations are not the same, and each state has its own rules and requirements. You will have to address your state taxes separately. You can find your state regulations on your state government website.