Help! I owe the IRS 20K!

August 19, 2020 by Jean Lee Scherkey, EA
Man distressed with tax bill

As you walk to your mailbox, you begin thinking about your Great Aunt Gertie. It was your birthday a couple of days ago, and Aunt Gertie never fails to send the best birthday cards. Between the grocery circulars and fast food coupons is a letter ─ not from grand ole Gertie, but the IRS. Everyone has that family member they prefer to love from far, far away, and Uncle Sam is yours. You open the envelope to discover you owe the IRS twenty thousand dollars! You begin to get that “light-headed,” “walls are closing in” feeling.

Before taking a hammer to the piggy bank you made in your ninth-grade ceramics class, it is essential to make sure you actually owe the tax due. This will mean digging out a copy of your filed federal income tax return for the year in question. Depending on the type of notice you received, the reason for why you owe the additional tax due may not be listed. If it is not, you may need to contact the IRS and ask them how the balance due was determined. Perhaps you unintentionally added or subtracted a zero or two on your income or withholdings? Maybe you forgot to make a couple of estimated tax payments that year?

Generally, the IRS has ten years from the date the tax is assessed to collect the tax due. The day the IRS assesses the tax is known as the assessment date. For most timely filed returns, the assessment date is April 15, unless April 15 falls on a weekend, holiday, or is extended by the IRS due to extraordinary circumstances, such as the COVID-19 pandemic. If a return is not filed by the due date, the assessment date is generally a few weeks after the return is submitted. The assessment date can be found on your IRS Account Transcript. The easiest way to access your account transcript is online here. You may also request your transcript by submitting Form 4506-T, Request for Transcript of Tax Return, or by calling the IRS using the telephone number listed on your most recent notice.

There can be more than one assessment date for a tax year. For example, if a return is audited or a taxpayer files an amended return and additional tax is assessed, the date the additional tax is assessed will start the ten-year Collection Statute Expiration Date (CSED) for those new taxes. If your return was audited or you filed an amended return where additional tax was added to the total balance due, please be sure to ask the IRS for all the dates of assessment and the amount of each assessment.

Once you determine the balance due is correct, the next step is to figure out how to pay the tax as quickly and painlessly as possible. Note that interest and penalties will continue to accrue until the tax is paid in full. If you have the financial means, promptly paying the entire balance will save you from paying compounding interest on the outstanding taxes, interest, and penalties. You may send a check or money order payable to the U.S. Treasury (not the IRS) to the address listed on the notice you received. When sending payments to the IRS, it is best to send them certified with a return receipt request to ensure the payment arrives. For those who prefer to pay electronically, the IRS has a Direct Pay service.

If the siren call of bonus points or miles seems too good to resist, carefully consider that there is a fee for using a credit card to pay a tax liability. The fee ranges from 1.87% to 1.99% of the payment amount, depending on which payment processor is used. For a $20,000 payment, the fee would be nearly $400. That is the equivalent of approximately eighty coffee frappes, a budget-friendly new dishwasher, or depending on where you live, a ticket on a midnight train to Georgia to visit Centennial Olympic Park and sip Coca-Cola. Additionally, if you cannot pay off the entire amount charged right away, you will be paying the credit card company interest, which is generally higher than the interest the IRS is charging on the unpaid balance.

Are you expecting an inheritance or bonus soon? Perhaps you have a rare coin collection you can sell or stock you can liquidate, but you just need a little time to gather the funds? The IRS does provide for a one hundred twenty-day extension to pay the balance due. The beauty of this short-term payment plan is that there are no setup fees.

You may want to contact the IRS and request a collection hold, otherwise known as a stay on collection on your account. A collection hold will temporarily halt any further collection enforcement actions such as a lien or levy and give you some time to assess your finances and payment options. Use this reprieve wisely. Asking for several holds may give the impression you are stalling, which may cause the IRS to take harsher enforcement action.

Homeowners may be enticed to refinance their mortgage and pay the tax due. However, think twice before refinancing your mortgage and using the money from the refinance to pay off the IRS. The Tax Cut and Jobs Act of 2017 suspended the deduction of mortgage interest paid when the proceeds from the mortgage are not used to buy, build, or substantially improve the home.

For those who are unable to pay the entire balance due promptly, the IRS offers various long-term payment agreements, also called installment agreements. The IRS has two simplified installment agreement plans that are relatively easy to apply for and generally do not require the taxpayer to provide a Collection Information Statement. A Collection Information Statement provides the IRS with information on a taxpayer’s sources of income (both taxable and non-taxable), assets, general expenses, and debts. Also, once a taxpayer enters into one of these simplified installment agreements, the IRS generally will not file a lien against their home or other assets. However, if a lien was filed before the taxpayer set up a payment plan, more often than not, the IRS will not lift the lien until the debt is paid in full. As with all things IRS, there are exceptions. Under certain conditions, the taxpayer may request a lien to be lifted or subordinated. A lien subordination makes the IRS lien second in importance to another creditor like a bank that holds the mortgage on the home. Having the IRS’s claim to the asset subordinate to the bank will allow the taxpayer to refinance their mortgage if needed. On account of the continued financial hardships brought upon by the Covid-19 pandemic, the IRS is not issuing a new Notice of Federal Tax Liens through August 31, 2020. Nonetheless, if the IRS feels the remainder of the tax liability will not be paid or if the taxpayer has a reoccurring history of owing tax, the lien may be imposed. Therefore, the affected taxpayer may not be able to secure a lien subordination or get a lien already in place lifted.

The first simplified plan is called a Guaranteed Installment Agreement. To qualify for a Guaranteed Installment Agreement, the taxpayer must owe less than $10,000 and be able to pay the entire balance due within thirty-six months (three years). The second plan, called a Streamlined Installment Agreement, is the best option for someone who owes $20,000 and needs to make monthly payments. Taxpayers can owe as much as $50,000 and still qualify for a Streamlined Installment Agreement. The IRS offers several different payment options, each with a separate user fee. However, if a taxpayer owes more than $25,000, they are required to pay the monthly installments through direct debit from their bank account or via a payroll deduction. Let’s face it. No one wants to share their IRS woes with their employer, so paying an installment agreement via a payroll deduction is not the most attractive proposition.

To qualify for any of the Streamlined Installment Agreement options listed below, the taxpayer must be able to pay the entire assessed tax due, including penalties and interest, within 72 months (six years). Also, the taxpayer must have filed all of their current and prior required income tax returns. (Usually, the IRS will consider a taxpayer in filing compliance if the last six years of income tax returns that were required have been filed.)
 

  • Applying for an Installment Agreement (IA) via online (called an Online Payment Agreement (OPA)), and the payments are made via Direct Debit: If the taxpayer applies for an installment agreement online and agrees to have the monthly payments automatically debited from their checking account, the setup fee is $31.
  • Applying for an IA by phone, mail, or in-person and the payments are made via Direct Debit: The setup fee is $107.
  • Applying for an IA online and the payments are not made via Direct Debit: The setup fee for this option is $149.
  • Applying for an IA by phone, mail, or in-person and payments are not made via Direct Debit: The setup fee for this option is $225.

For those taxpayers who are considered low income, the IRS will generally waive or reimburse the setup fee. Whether the fee is waived or reimbursed when the entire balance due is paid will depend on how the installment agreement is applied for and how the payment is remitted. To be considered low income, the taxpayer’s adjusted gross income must be at or below 250% of the federal poverty limit. If a taxpayer believes they qualify as low income, they can fill out and submit Form 13844 Application for Reduced User Fee for Installment Agreements. As you can see from the setup fees above, the more the taxpayer uses the IRS’s automated systems, the lower the fee.

So, what happens if Junior decides to try his hand at skateboarding, and while trying his first kickflip, lands on his left wrist rather than the skateboard? Instead of paying Uncle Sam, you wind up paying the doctor to cast your son’s arm. Will the IRS consider the installment agreement to be in default and begin other collection actions? Fortunately, even the IRS understands Junior’s need to live life on the wild side and will not consider the agreement to be in default for one missed payment. That being said, it is good to contact the IRS as soon as possible to let them know you will be unable to make this month’s payment. If a taxpayer misses more than one payment and does not notify the IRS to make other arrangements, the IRS will consider the agreement to be in default. The fee to reinstate an installment agreement is generally $89. If the taxpayer is considered low income, the reinstatement fee will be lower and may be reimbursed when the balance is paid in full.

In this time of global pandemic and financial insecurity, it is not unusual that taxpayers may not be able to pay their rent, put food on their table, and make a monthly payment to the taxman. When this happens, a taxpayer’s account may be placed in currently not collectible status. To be placed in currently not collectible status, a taxpayer will need to fill out a Collection Information Statement. Based on the taxpayer’s income, assets, expenses, and liabilities, the IRS will decide whether the taxpayer can currently make payments. Another alternative available to taxpayers who do not have the means to make monthly payments is an Offer in Compromise (OIC). With an OIC, a taxpayer proposes a payment amount that is less than the amount owed. Preparing an OIC is an involved process. The IRS has an Offer in Compromise Pre-Qualifier tool on its website that can help a taxpayer decide if they may qualify.

For those who keep an eagle eye out for silver linings and rainbows, you may be in luck. If you have had a good track record with the IRS up until this point, you may be able to get the failure to pay penalty abated by using what is called first-time abatement. Another way to possibly abate the failure to pay penalty is through reasonable cause. Examples of reasonable cause are sudden unemployment, a death in the immediate family, or illness of the taxpayer or a member of their immediate family. If all of the above payment alternatives make you want to pack your bags and head over to your Great Aunt Gertie’s to hide out, hold off on buckling Fido in the backseat of your car. The exceptional tax professionals at TaxAudit’s Tax Debt Relief can answer your questions and guide you on the best payment alternative for your unique situation. No two taxpayer situations are the same, and this is why we offer a free initial consultation to get to know you and your situation. We offer a wide range of tax debt relief services, including setting up an installment agreement, Offer in Compromise, and helping taxpayers who qualify obtain Currently Not Collectible status. We may even be able to assist you with abating penalties! Ultimately, it is more fun to visit Aunt Gertie when you are footloose and fancy-free and not when you are trying to hide out from the IRS.

Do you owe money to the IRS or State?

Get Professional Help Now!

SEARCH

 

Jean Lee Scherkey, EA
Learning Content Developer

 

Jean Lee Scherkey began her career at TaxAudit in 2015, and her current title is Learning Content Developer. She became an Enrolled Agent in 2005. For several years, Jean owned a successful tax practice that specialized in individual, California and trust taxation, and assisting those impacted by tax identity theft. With over fifteen years of varied experience in the field of taxation, Jean has worked at different private tax firms as a Staff Practitioner, Tax Analyst, and Researcher. Before coming to TaxAudit, she worked over two years for TurboTax as an “Ask the Tax Expert.” In addition to her work in TaxAudit’s Learning and Development Department, Jean is actively involved in the company’s ENGAGE Volunteer Program, which provides opportunities for employees to help and serve the local community.  


 

Recent Articles

State and Local Taxes
You can deduct certain state and local taxes (SALT) if you choose to itemize deductions on your tax return rather than claiming the standard deduction.
Oil Change
There is a very good chance that you can indeed deduct the cost of your oil changes if you use your car or truck for business purposes. Let's look closer at it.
Wooden House next to Money Bag
In general, only mortgage interest and property taxes are deductible in the transaction year, while some expenses and fees can be added to the cost basis.
Audit Letters
Avoid the temptation to ignore the notice. In most cases, the IRS or a state agency may only need additional information to finish processing your return.
This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.