Few pieces of paper can tie your stomach in a knot like a letter from the IRS. Whether or not you see it coming, it’s scary. If you owe taxes but are unable to pay them, you’ll be receiving a notice from the IRS. Fortunately, there are usually a few notices before the IRS resorts to levies and liens.
We’ll discuss what the notices mean and what to do about them, but first here’s what NOT to do with an IRS notice.
Ignoring a notice from the IRS
If you’re confused about what to do next, worried because you can’t afford to pay the tax, or just trying to delay the inevitable, the easy thing to do is ignore the notice and put it off a bit longer. Don’t do it!
As soon as your taxes are due and unpaid they start accumulating a 0.5% per month failure-to-pay penalty PLUS interest on the balance. As soon as you are in collections (which you are if you’ve received a notice) this double to 1% per month. The only way to slow it down is to enter a payment arrangement with the IRS, which will reduce the penalty down to 0.25% until the balance is paid.
The only thing worse is avoiding filing altogether. For instance, if you still owe from a prior year and avoid filing this year because you can’t pay, you’ll incur a failure to file penalty, which is a much higher 5% per month and may be accompanied by criminal tax evasion charges if you are deliberately avoiding filing. It’s always best to file and then set up an arrangement to make payments.
The collection notice stream
The IRS tries to minimize the amount of unpaid tax in collections by sending out notices to collect the tax. Anyone who has unpaid taxes will receive an initial notice informing them of that balance and requiring payment. If you don’t pay after the first notice, you’ll receive a “stream” of notices, which could be as few as one or as many as four or five spread over about five months.
How many notices will you receive? That’s the big question. The answer is “It depends.” If you owe personal taxes and it’s your first time in collections, you’ll receive more notices before further action is taken. If you owe business or payroll taxes or have owed the IRS before, you’ll get less leeway and likely only get one more notice before they pursue payment with levies and liens.
Finally, if your account has been in collections for a while and you’ve run out of polite notices, you will receive a notice of lien or levy and possibly a CP40 (notice that you’ve debt has been transferred to a private collections agency)
What to do with IRS notices
When you receive any communication from the IRS, you should give it to your tax advisor, the sooner the better. They can help you understand the actions you need to take to minimize risks, penalties, and interest and resolve your tax issues in the best possible way.
If you’ve received any of these notices from the IRS, please contact us and speak with one of our expert tax advisors. We can help you figure out the best plan of action to move forward and resolve your tax debt.
Hamilton Tax Specializes in defending you against the IRS. You can reach us at (224) 381-2660 or schedule a consultation here.