Discovering that you owe money to the IRS can be a daunting realization. Whether it’s a result of an audit, a discrepancy on your tax return, or simply underpayment of taxes, the important thing is not to panic. Here are steps you can take to address the situation and minimize the impact on your financial health.
Steps to Take After Receiving an IRS Letter
1. Verify the Debt
First and foremost, ensure the debt is legitimate. The IRS will notify you of any tax liabilities through a mailed letter, on official IRS letterhead. Be wary of phone calls or emails claiming to be from the IRS, as these are likely scams. If you receive a notice (often a CP-Series Notice), read it carefully to understand why the IRS believes you owe money. Sometimes, these notices result from discrepancies or misunderstandings that can be easily resolved.
2. Don’t Ignore the Notice
Ignoring IRS notices can lead to increased penalties and interest, making the situation worse. The IRS may also take more aggressive collection actions, such as tax liens on business or personal property and/or levies on salaries or bank accounts. Responding promptly, even if you cannot pay the full amount immediately, shows a willingness to resolve the issue. The IRS is more willing to work with taxpayers who show a proactive approach to resolving their debts.
3. Review Your Payment Options
If you confirm that you owe the IRS money, assess your payment options. The IRS offers several payment plans and solutions for taxpayers who has tax debt:
- Short-term Payment Plan: If you can pay the full amount within 120 days, this option minimizes penalties and interest.
- Installment Agreement: This is a payment plan where you pay your tax debt over time in monthly installments. There are several types of installment agreements, and the one that’s right for you depends on how much you owe and your ability to pay. Applying for a short-term or long-term payment plan can be done online through the IRS website.
- Offer in Compromise (OIC): This program allows you to settle your tax debt for less than the full amount you owe if paying your full tax liability would cause financial hardship. The IRS considers your income, expenses, asset equity, and ability to pay when determining whether to accept an OIC.
4. Consider Professional Help
Dealing with tax debt can be complex, and the stakes are high. If you’re unsure how to proceed or if the debt is significant, consider consulting a tax professional. A qualified tax advisor, Enrolled Agent (EA) or Certified Public Accountant (CPA) can help you understand your situation, explore your options, and negotiate with the IRS on your behalf.+
5. Stay Ahead of Future Taxes
To avoid future tax debts, ensure you’re withholding enough taxes from your income. Regularly review your withholdings and make adjustments as necessary, especially after major life changes like marriage, divorce, a new job or even a salary increase. Consider working with a tax professional for tax planning and advice to keep your taxes on track.
6. Act Quickly to Resolve the Debt
The sooner you address your tax debt, the better. Quick action can prevent additional penalties and interest from accruing and protect your credit score from the impact of tax liens. Even if you can’t pay the full amount immediately, showing that you’re taking steps to resolve the debt can work in your favor.
Owing money to the IRS can be stressful, but it’s a situation that can be managed with careful planning and prompt action. By understanding your options and taking the appropriate steps, you can resolve your tax debt and avoid similar issues in the future. Remember, the worst thing you can do is ignore the problem. With the right approach, you can navigate this challenge and secure your financial well-being.
Can You Travel If You Owe the IRS Money?
A common concern for those who owe money to the IRS is whether or not it will affect their ability to travel, especially internationally. The good news is that, in most cases, owing money to the IRS does not directly prevent you from traveling domestically or internationally. However, there are certain circumstances under which tax debt can impact your travel plans.
Serious Tax Debt and Passport Restrictions
The most significant way in which owing the IRS can affect your ability to travel is through the revocation or denial of your passport. As part of the Fixing America’s Surface Transportation (FAST) Act, the IRS is authorized to certify taxpayers with “seriously delinquent tax debt” to the U.S. Department of State. Tax debt is considered seriously delinquent if it exceeds $62,000 USD (this threshold is subject to inflation adjustments).
Once the IRS certifies the debt as seriously delinquent, the State Department generally will not issue or renew your passport. In some cases, they may even revoke your current passport. If you’re in the process of applying for a passport, this process can be halted until the tax issue is resolved.
Steps to Remove Passport Restrictions
If you find yourself facing passport restrictions due to tax debt, there are several steps you can take to resolve the issue:
- Pay the Debt in Full: The most straightforward way to remove the restriction is by paying the tax debt in full, although this may not be feasible for everyone.
- Set Up a Payment Plan: Entering into an installment agreement with the IRS to pay off your debt over time can also lift the certification and allow you to travel.
- Offer in Compromise: If you can settle your tax debt for less than the full amount owed through an Offer in Compromise, this can also remove the restrictions on your passport.
- Contest the Certification: If you believe the certification was made in error, you have the right to contest it. This might be the case if the debt was already paid, legally unenforceable, or if you were in bankruptcy at the time of certification.
While owing money to the IRS can potentially impact your ability to travel internationally by affecting your passport status, it does not automatically restrict your travel. Understanding the implications of serious tax debt and taking proactive steps to address any issues can help ensure that your travel plans remain unaffected. If you’re facing passport restrictions due to tax debt, consider reaching out to a tax professional to explore your options for resolving the debt and lifting any travel restrictions.
What Should I Do If I Owe the IRS Money and Cannot Pay?
Finding yourself in a situation where you owe money to the IRS and cannot afford to pay can be incredibly stressful. However, it’s crucial to know that the IRS offers several options to help taxpayers manage their debts. Taking action early can prevent additional penalties and interest, and may protect you from more severe enforcement actions like liens or levies. Here’s what you should do if you find yourself unable to pay your tax debt:
If you can prove to the IRS that you cannot pay any of your tax debt due to financial hardship, the IRS may place your account in a “Currently Not Collectible” status. While this doesn’t erase your debt, it temporarily halts collection efforts.
Can you go to jail if you owe the IRS money?
The fear of going to jail for owing money to the IRS is common, but it’s important to understand the distinctions between tax mistakes, tax debt, and actions that could lead to criminal charges. Simply owing money to the IRS, even in large amounts, is not a criminal offense and typically does not result in jail time. The IRS’s primary interest is in collecting the taxes owed, not punishing taxpayers with imprisonment. Here’s a breakdown of the scenarios:
Tax Debt Alone Does Not Lead to Jail
If you owe the IRS money because you made an error on your tax return or couldn’t afford to pay your tax bill, you’re not facing jail time. The IRS offers several options for managing and repaying your debt, such as payment plans and offers in compromise. The consequences of not paying your tax debt can include penalties, interest, liens, and levies, but not incarceration.
Actions That Can Lead to Criminal Charges
There are specific actions related to taxes that can lead to criminal charges, including jail time. These actions are generally intentional attempts to evade tax laws:
- Tax Evasion: Deliberately underreporting income, claiming false deductions, or hiding money in “offshore” (i.e. other countries) accounts to avoid paying taxes can lead to charges of tax evasion.
- Tax Fraud: Filing a tax return with false information to reduce your tax liability or inflate your refund is tax fraud. This includes claiming deductions or credits you’re not entitled to or not reporting all your income.
- Willful Failure to File: Intentionally failing to file your tax returns when you owe taxes can lead to legal trouble. While simply forgetting to file or being unable to pay does not result in jail time, willfully avoiding filing your taxes is a criminal offense.
Judicial Relief and Civil Penalties
Most tax-related issues are handled as civil matters, not criminal. This means the IRS imposes financial penalties rather than seeking jail time. Even in cases of underpayment or inaccuracies on your tax return, the IRS typically seeks to collect what is owed through civil penalties, interest, and sometimes audits. Criminal prosecution is reserved for those who willfully and intentionally violate tax laws.
Payment Options For The IRS
As mentioned above the IRS provides the option to make payments over time. The IRS offers several payment plan options to taxpayers who find themselves in this situation. These plans allow you to pay off your tax debt through monthly installments, making it more manageable to settle your tax liabilities without putting undue strain on your finances. Here’s an overview of the main payment plan options available:
Short-Term Payment Plan
- Eligibility: If you owe less than $100,000 in combined tax, penalties, and interest, you may qualify for a short-term payment plan.
- Duration: You must pay your tax debt within 120 days or less.
- Cost: There is no setup fee for a short-term payment plan.
Long-Term Payment Plan (Installment Agreement)
- Eligibility: If you owe $50,000 or less in combined tax, penalties, and interest, and have filed all required tax returns, you may qualify for a long-term payment plan, also known as an installment agreement.
- Duration: The specific terms and length of the payment plan can vary, but all plans are designed to allow you to fully pay your tax debt within an extended timeframe that can go beyond 120 days.
- Cost: There are setup fees associated with long-term payment plans, which can vary depending on how you apply (online, phone, mail, or in-person) and whether you choose to make manual payments or set up automatic withdrawals from your bank account. Low-income taxpayers may qualify for a fee waiver or reimbursement.
Applying for a Payment Plan
You can apply for most payment plans online through the IRS website. The online application process is straightforward and provides immediate notification of approval. For taxpayers who prefer not to use the online system, it’s also possible to apply by phone, mail, or in person at an IRS office. When applying, you’ll need to provide basic information about your financial situation, including your income, expenses, and asset equity.
Considerations
- Interest and Penalties: While a payment plan allows you to pay your tax debt over time, interest and late payment penalties continue to accrue until the debt is paid in full.
- Tax Refunds: If you have a payment plan in place and are due a tax refund in future years, the IRS may apply your refund to your tax debt.
- Compliance: To keep your payment plan in good standing, you must make all scheduled payments and file all future tax returns on time.
Avoiding IRS Scams
Many companies promise to reduce a person’s tax bill, often unethically. They will use emotional promises preying on your desperation. Many of these companies are dishonest and might not have employees with the right motives to help you. The truth is you can work with the IRS yourself to resolve your debt. This booklet from the IRS provides information on how offer in compromise works.
If you believe you require professional help, you should work with a qualified professional like an Enrolled Agent to help you. Enrolled agents are federally licensed tax practitioners and can represent you in front of the IRS. They have to adhere to ethical standards and take continuous education courses to remain active.
