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What Do I Do If I Owe Taxes… And Can’t Pay

January 12, 2009

With the current bleak state of the economy, many taxpayers may find their ability to pay taxes has been negatively impacted by unemployment or corporate downsizing, loss on investments and reduced income. When in these circumstances, the reaction of many taxpayers is to ignore the problem and procrastinate in dealing with the IRS.

Not filing a tax return is NOT a good idea! Along with the possibility of criminal consequences, this lack of action can result in substantial civil penalties. The penalty for failure to file is an additional 5 percent per month of the amount of tax you owe, up to a maximum of 25 percent, plus an additional penalty of ½ percent per month for failure to pay. If the failure to file is fraudulent, the penalty is increased to 15 percent per month, up to a 75 percent maximum.

Once a return is filed, the collection process begins. Within 60 days after a tax has been assessed, the IRS sends a notice of the amounts assessed and a demand for payment before it can start its collection procedures.

The IRS has broad collection powers including the ability to file tax liens, tax levies and access penalties. A federal tax lien is a notice that attaches to all of the taxpayer’s property and affects the taxpayer’s credit. A tax levy is the actual taking of property. The IRS has the right to levy certain property such as wages, bank accounts, vehicles and retirement funds. The IRS also assesses penalties for a variety of reasons for violation of provisions of the tax code.

If you haven’t exactly been the IRS Poster Boy or Poster Girl for tax filing, don’t fret – there are a variety of solutions to resolve your tax problems.

Installment agreements

The IRS may enter a written agreement with the taxpayer to satisfy liability for any tax installment payments. An individual who owes $10,000 or less and meets other conditions can force the IRS to enter into an installment agreement provided that it can be paid within five years. For larger amounts or more time, the IRS will consider whether to approve an installment agreement after it evaluates your financial situation.

Current uncollectable status

If a taxpayer is current with all tax payments, but is temporarily unable to pay a tax liability, the IRS may classify the debt as currently uncollectable. The debt remains, including penalties and interest keeps growing but the IRS agrees to refrain from collection for a set period of time.

IRS Offer-in-Compromise

The objective of an offer-in-compromise is to discharge all of your tax liabilities for less than the amount owed .The IRS reviews your financial information and based on a two-part formula determines if it will accept your offer. The first part is the equity in assets you own. The second part is the income remaining each month after paying for allowable expenses, multiplied by 60.


The filing of a federal bankruptcy petition automatically stays any tax proceedings against the taxpayer debtor. With some exceptions, the bankruptcy does not discharge the taxpayer’s liability for taxes or interest. Some taxes due for tax years for more than three years prior to the filing may be discharged under specific circumstances.

Tax Penalty Abated

Some tax penalties may be abated if the taxpayer can show reasonable cause. Relief is an option for some, but not all IRS penalties. Eligible taxpayers must show where there were unusual circumstances that made it difficult to comply with the tax law. This could include a scenario in which there was disruption of your normal life due to serious illness or death. Also, the unavoidable ability to obtain tax records may be justification for an abatement of penalties.

To increase your likelihood of success in resolving your tax problems, always work with a tax professional. While no one can guarantee results, turning to someone who is knowledgeable about all the tax ramifications of your individual issues will insure the best results.