What Happens When You Owe the IRS Money?

What happens when you owe the IRS

It’s that time of year so many of us dread – tax time. And today, April 15th, is the last day to file a 2013 tax return without penalty.

Factoid: If you file late and are due a refund, there’s no penalty! But the IRS won’t honor the refund for more than three years.

What happens if I don’t pay my taxes?

If you owe a big tax bill that you can’t afford to pay, ignoring it will only make things bad and worse. Your debt will grow.

If you owe money to the federal government, they won’t stop looking for you, at least for a while. The IRS has ten years from the date the tax was assessed in most cases, but calculating the date can be tricky. If you filed a return, the clock starts the day you file. If you neglected to file a return, the clock starts ticking on the day the IRS assesses the tax, which could be, for example, three years after the tax year in question during an audit. Then there are several circumstances under which the statute’s clock may be paused, so it’s entirely possible for the expiration to be several years beyond the 10-year mark. For example, if you submit an Offer in Compromise (see below) that is ultimately rejected, the clock stops while it is under consideration.

During the period of collections, the IRS can and will seize or place liens on your assets (personal or business) and account they can find in your name (with some exceptions, of course). In addition to garnishing your wages and withholding annual tax refunds, they can take money out of your bank accounts and lay claim to your property. Once the statute of limitations eventually runs out, they

State governments can and will take similar actions, and their statutes of limitations vary. Some have no statute of limitations at all.

What to do if you owe the IRS

File your return on time, even if you can’t send in full payment at the same time. Send in whatever amount you can afford. Don’t panic. Contact the IRS to work out a solution.

Request an installment plan by submitting an online application. If the amount you owe is large, you may have to make your request by mail.

In an extreme case where the taxpayer simply has no ability whatsoever to make a payment in any amount, the IRS can declare the debt (temporarily) noncollectible. This determination might provide an extra year or two for the taxpayer to regain some financial stability.

Contact the Offer in Compromise Department if your tax debt has already ballooned and you want to negotiate a settlement. If you qualify to submit an offer (taxpayers in bankruptcy proceedings are not eligible), the IRS will require detailed financial information, and the review process can take several months.

Hiring an attorney is a personal choice, but the IRS system is designed for average taxpayers to navigate. An attorney can’t negotiate any settlement that you can’t negotiate on your own. The attorney simply has the advantages of experience and detachment. If you need free help, contact the Taxpayer Advocate Service at www.irs.gov/Advocate.

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Published April 15, 2014 Updated: April 11, 2014
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