When you owe taxes, it’s crucial to take proactive and responsible steps to address the situation. Ignoring it can lead to penalties and interest piling up over time. Start by thoroughly reviewing your tax return for accuracy and ensure you’ve claimed all applicable deductions and credits. If you can’t afford to pay the full amount owed upfront, consider arranging a payment plan with the tax authorities, such as the IRS in the United States, to spread the payments over time. Explore options like requesting a filing extension or negotiating a settlement if you have a valid reason for owing taxes. Seeking professional advice from a tax expert or accountant can also prove invaluable in navigating your unique tax circumstances and alleviating financial stress.

Taxes are a crucial part of our financial responsibilities, but what happens when you find yourself owing taxes instead of receiving a refund? It’s a common situation that many people face, and it’s essential to know how to handle it effectively. In this blog post, we’ll explore what to do when you owe taxes to the IRS or your state’s tax authority. According to recent statistics, a significant percentage of taxpayers are in the same boat, and this guide aims to provide guidance on managing your tax debt.

The Reality of Owing Taxes:

Believe it or not, owing taxes is a common occurrence. In fact, approximately 15% of all taxpayers find themselves owing back taxes. This statistic includes only those who have filed their tax returns. There are many individuals who are required to file tax returns but haven’t done so yet– and many of those folks also owe, too. Whether you’ve filed your return and discovered that you owe taxes or you’re among those who haven’t filed at all, the steps to address the situation are similar.

Facing a situation where you owe back taxes can be stressful, but it’s crucial to understand the reasons behind it and how to address them effectively. Whether you failed to file a return, didn’t pay in full, made mistakes on your return, or underwent an audit, we’ll shed light on why these situations occur and what steps you can take to resolve them.

You Didn’t File a Return; the Tax Authority Prepared One for You:

When you don’t file a return, oftentimes, state or federal tax agencies will prepare the return for you. These are sometimes referred to as “filing enforcement” or “Substitute for Return.” More often than not, the tax returns prepared by governmental tax agencies fall short of accurately reflecting your true financial situation. This discrepancy arises primarily from the fact that these agency-prepared returns frequently neglect crucial deductions and exemptions, sometimes even overlooking basic ones that could significantly benefit the taxpayer.

In some instances, taxpayers might consciously or inadvertently fail to file their tax returns, assuming they can fly under the radar. However, this can trigger intervention from tax authorities such as the Internal Revenue Service (IRS) or California’s Franchise Tax Board. When these authorities step in to prepare a return on your behalf, it’s important to be aware that the resulting document often fails to seize the opportunities presented by deductions and tax credits you might be entitled to. This oversight can potentially result in a higher tax liability than necessary, leaving you with a larger tax bill than you rightfully owe.

What to Do: In this case, it’s essential to file your own accurate return as soon as possible to correct any discrepancies and potentially reduce your tax liability.

You Didn’t Pay Taxes in Full When Filing Your Return:

When you filed your tax return but found yourself unable to cough up the full amount of taxes owed at that moment, it’s quite possible that you’ve accumulated what’s known as back taxes. Now, here’s the thing: even though you couldn’t pay the full amount right away, the IRS and state tax authorities still have expectations when it comes to fulfilling your tax obligations. 

In fact, failing to address your back taxes can lead to a whole host of financial headaches. The IRS and state tax authorities are quite serious about this, and they’re not just going to let it slide. They’ll start adding interest and penalties to the amount you owe, and those can pile up pretty quickly.

So, while it might have been tough to pay your full tax bill initially, it’s essential to take steps to address those back taxes sooner rather than later. Ignoring the issue won’t make it go away, and the sooner you get on top of it, the less you’ll end up owing in the long run. There are various options available, such as setting up a payment plan or exploring other forms of tax relief, so it’s a good idea to reach out to the tax authorities or a tax professional to figure out the best approach for your specific situation. It’s better to tackle the issue head-on and avoid those extra interest and penalties down the road.

What to Do: Reach out to the tax authority to discuss payment options, such as setting up a payment plan, to gradually satisfy your tax debt while avoiding additional charges.

You Believed You Paid in Full but Received a Tax Agency Notice:

Getting a notice from a tax agency stating that you owe additional taxes can be quite the unexpected and vexing experience. It’s the kind of mail that can cause your heart to skip a beat. You might be left wondering how this happened, especially if you thought you’d crossed all your T’s and dotted all your I’s when you filed your tax return. But here’s the deal: such notices typically indicate that there was an error or omission on your tax return that the agency has uncovered during their meticulous review.

Now, let’s dive a bit deeper into this. Tax agencies, like the IRS or your state’s tax authority, don’t just twiddle their thumbs once they receive your tax return. They put it through a thorough examination, looking at all the numbers, calculations, and supporting documents. It’s like they have a magnifying glass out, scrutinizing every detail. And sometimes, in the midst of this scrutiny, they spot something that doesn’t add up or appears to be missing.

This is where those notices come into play. They’re basically a way for the tax agency to say, “Hey, we noticed something fishy here, and it seems you might owe more taxes than you initially reported.” It’s like a red flag that pops up when they discover discrepancies between what you reported and what they believe to be accurate based on their own data.

So, if you ever find one of these notices in your mailbox, take a deep breath, read it carefully, and consider seeking professional advice if needed. It’s an opportunity to rectify any mistakes and ensure that your tax situation is accurate and compliant with the law. In many cases, errors can be corrected, and any additional taxes owed can be settled through various means, such as installment plans or negotiations with the tax agency. Remember, it’s all part of the tax process, and with the right approach, you can navigate through it successfully.

What to Do: Carefully review the notice, identify the issue, and respond promptly. You may need to file an amended return or provide documentation to support your case.

After an Audit, You Agreed to Owe Additional Taxes:

If you underwent an audit, and the IRS or state tax authority determined that you owed more taxes, you may have signed an audit report in agreement. This legally binds you to pay the assessed amount so long as you are financially able. If you aren’t able, you will need to look at long-term settlement options.

What to Do: Fulfill your obligation by paying the agreed-upon amount. If it’s a financial burden, explore payment options or consult a tax professional for guidance.

After an Audit, You Didn’t Sign the Report or Appeal:

In cases where you didn’t agree with the audit findings but didn’t appeal or go to Federal Tax Court, you may still owe back taxes as determined by the audit.

What to Do: If you disagree with the audit results, it’s crucial to pursue the appropriate appeals process or consider settling with the tax authority to resolve the matter.

After an Audit and Tax Court Petition, You Still Owe Taxes:

Even after filing a Tax Court Petition and participating in the process, you may find yourself owing taxes if the court’s decision does not fully eliminate your liability.

What to Do: If this happens, work with a tax professional to understand your remaining tax liability and develop a plan to address it.

What happens when you owe back taxes?

No matter which category you fall into, dealing with the IRS and/or the Franchise Tax Board can pose significant challenges. Unlike private creditors, these government agencies don’t need to go through the courts to take action like seizing your bank account or garnishing your wages. They have the authority to levy your business assets, bank accounts, and even tap into your pension or social security benefits.

The IRS typically initiates this process by sending computer-generated notices from their Service Center. If the issue persists, the Automatic Collection System (ACS) steps in, bombarding you with increasingly stern notices. For substantial debts, the IRS may assign a Revenue Officer to handle your case. And if the debt doesn’t reach the threshold for a Revenue Officer’s involvement, it may be outsourced to a private collection agency.

When it comes to state tax agencies like the California Franchise Tax Board and the State of Nevada Taxation Department, their collection procedures are somewhat similar. However, they tend to be more expedient and relentless in pursuing their collections, as state tax law is rarely as comprehensive and limiting as it is on a federal level.

In essence, dealing with tax debts owed to these agencies can be a formidable challenge, and it’s crucial to understand the procedures and potential consequences involved. Seeking professional assistance or understanding your rights and options is often advisable to navigate this complex terrain and find a solution that best suits your circumstances.

How Long do the IRS and State Tax Agencies Have to Collect?

Contrary to some common misconceptions, the IRS doesn’t have an indefinite timeframe to collect taxes you owe. The Internal Revenue Code, specifically section 6502, outlines that the IRS has a ten-year window to collect taxes from the date of assessment. Once those ten years have passed, the debt is considered legally extinguished, and you’re no longer obligated to pay it.

On the other hand, the California Franchise Tax Board and the state of Nevada operate with a longer collection window of 20 years from the date of assessment, though California often argues that they can extend the Statute for a number of reasons, including if the taxpayer owes back child support.

In fact, it’s crucial to note that there are certain scenarios in which the collection statute can be extended. For instance, the IRS can prolong the ten-year period by taking legal action against you in federal court, although this is relatively uncommon for tax debts under $300,000. Additionally, specific actions on your part can trigger an extension of the statute. Filing an Offer in Compromise, declaring bankruptcy, residing outside the country, requesting a Taxpayer Assistance Order, or filing for a Collection Due Process (CDP) hearing can all result in an extension of the ten-year statute.

What are the six ways to deal with a tax bill you owe?

When facing a tax bill you owe, there are several ways to address the situation:

1. Pay in Full: The most straightforward option is to pay the entire tax bill in a lump sum. This is often the best choice if you have the financial means to do so, especially if you own substantial assets or homes.
2. Pay in Monthly Installments: Many individuals opt for monthly installment plans to spread out their tax payments over time. This approach can make it more manageable for those who can’t pay the full amount upfront. In fact, over 2.6 million people are currently on installment plans with either the IRS or the Franchise Tax Board.
3. Discharge the Debt Through Bankruptcy: In some circumstances, tax debt may be eligible for discharge through bankruptcy proceedings. However, the rules regarding tax debt discharge in bankruptcy can be complex, and not all tax debts qualify.
4. Reduce the Tax Debt Through an Offer in Compromise: An Offer in Compromise (OIC) allows you to negotiate with the tax agency to settle your debt for less than the full amount owed. This option is available in specific situations, and the process can be quite detailed.
5. Have the Tax Agency Put You on Uncollectible Status or Currently Not Collectable Status: If you’re facing financial hardship, you may request that the tax agency place your account in “uncollectible” status. This means they won’t actively pursue collection efforts against you, although interest and penalties may continue to accrue.
6. Wait for the Statute of Limitations to Expire: The tax agencies have a limited time frame, as per the statute of limitations, to collect on tax debts. Once this period expires, the debt is considered unenforceable. However, this option typically requires waiting for several years, depending on the specific tax agency and circumstances.

Understanding the best approach for your situation depends on your financial circumstances, the amount of tax debt you owe, and various other factors. Seeking professional guidance or contacting the tax agency directly can help you navigate these options effectively. If you’re uncertain about how the IRS calculated your tax bill and credited your payments, you can request a transcript of your account using the IRS – Get Transcript tool on IRS.gov, which can provide insights into your tax situation. Similarly, the California Franchise Tax Board has their online “MyFTB” portal. 

Believe it or not: the Tax  Gap exists

The tax gap is a significant and concerning issue within the United States tax system. It refers to the difference between the total amount of taxes owed to the IRS and the amount of taxes actually collected. Recent statistics reveal that the IRS collects only about 85.5% of the income taxes owed by nearly 12 million individuals.

To put this into perspective, the uncollected amount from these individuals alone exceeds a staggering $350 billion. And that’s not even the whole picture. When you factor in the amount owed on unfiled tax returns, the overall tax gap grows even larger. In essence, the tax gap represents the substantial sum of money that taxpayers either underreport or fail to pay, which, when added up, has a significant impact on the government’s revenue.

Addressing the tax gap is a priority for the IRS and tax authorities. They employ various strategies and enforcement measures to narrow this gap, including audits, investigations, and penalties for non-compliance. Additionally, enhancing tax compliance and simplifying the tax code are ongoing discussions aimed at reducing the tax gap and ensuring a fair and equitable tax system for all taxpayers.

You’ve prepared a return, but can’t pay. What do you do?

When you find yourself in a situation where you can’t pay the full tax amount with your return, here are some steps to consider:

1. If you have a tax return due and can’t pay the full balance, it’s still essential to file your return on time. This action helps you avoid incurring a hefty late penalty, which can amount to five percent of the outstanding balance per month.
2. If you’re unable to pay the full amount but can manage to pay over time, there’s an option for you. If you owe less than $50,000, you can enclose a completed Form 9465, known as the Installment Agreement Request, with your return. You can find this form by doing a quick search online or visiting the official IRS website at IRS.gov.

• If your debt falls under the $50,000 threshold and you can pay it off within 72 months or less, your request for an installment agreement should typically be granted. The IRS usually responds within 30 to 60 days. However, keep in mind that due to budget constraints, even with increased funding through the Inflation Reduction Act, the IRS may take longer to process these requests.

1. For debts exceeding $50,000, the IRS may require a higher monthly payment. If your request for an installment agreement is denied, and you can’t come to an agreement with the IRS, you might need to provide financial information and engage in negotiations over the phone or through written correspondence.

So, what if you need more time to pay after the tax bill arrives? If you didn’t pay the balance due on your tax return or your request for an installment agreement was rejected, you can request up to 120 days to settle the bill. You have the option to either mail your request for a 120-day payment extension or call the IRS at 800-829-1040.

Keep in mind that carrying a tax balance comes with its costs. The IRS charges interest and a late payment penalty, which accrues at a rate of half a percent per month. Considering the current federal funds rate, the effective interest rate on your outstanding balance falls within the range of six to eight percent.