If you owe back taxes, it’s important to act quickly and set up a plan for repayment.
“The most important thing a taxpayer can do to help reduce penalties and expenses associated with an IRS notice is to take action right away,” says Michael Raanan, enrolled agent and president of Landmark Tax Group.
But corresponding with the Internal Revenue Service can be confusing and chaotic, as taxpayers increasingly report erroneous notices, unanswered phone calls and processing delays from the IRS in recent years.
So how do you know if you owe the IRS? Follow these steps when you receive any sort of correspondence from the IRS and take advantage of these resources available for understanding and paying off your tax bill.
How Do I Know If I Owe the IRS?
There are several ways to discover whether you owe back taxes to the IRS, including these:
— You receive a notice from the IRS via mail. The IRS will let you know if you owe back taxes with a mailed notice. To avoid scammers, remember that the IRS will never email, text, contact you initially via phone or reach out via social media.
— Logging in to your tax account on IRS.gov. Once you log in, you can access your tax records, make or view payments and view the amount you owe along with a breakdown of your liability by tax year.
— Filing or reviewing tax returns. Determining back taxes may be as simple as filing or amending a previous year’s tax return.
— Contacting the IRS at 800-829-1040. You may choose to call the IRS to get more information on your outstanding tax bill. Of course, particularly during peak tax season months, keep in mind it may be difficult to reach a real person.
However, determining how much you owe and why can be a challenge for some taxpayers due to the current backlog at the IRS, which consists of tens of millions of unprocessed returns that IRS Commissioner Charles Rettig says will be cleared by the end of 2022.
“The simple answer is to respond to notices quickly,” says Mitchell Freedman, a certified public agent and president and founder of M Freedman & Co. Inc. “Unfortunately, due to staffing issues, sometimes the IRS computers will generate follow-up notices because nobody has addressed the taxpayers’ responses as of yet, which is sitting in a pile somewhere.”
Most importantly, never ignore a notice from the IRS. Tax professionals say it may be wise to check and double-check how much you owe using a couple of the methods above to ensure you have the correct figure, then take action.
[See: 15 Tax Questions Answered.]
How Long Can You Owe the IRS?
Typically, the IRS has 10 years from the date of first notification to complete the collection of back taxes and three years from your filing date, including extensions, to notify you of taxes owed.
“The 10-year clock starts on the date the tax was actually ‘assessed,’ i.e., put on the books,” Raanan says. “But the statute date can get extended due to activity on an account, such as a bankruptcy, an appeal, filing an offer in compromise and more.”
When a tax bill goes unpaid over a long period of time, the IRS may begin collecting through enforcement actions, which include issuing a bank levy or filing a tax lien.
[See: Red Flags That Could Trigger a Tax Audit.]
Ways to Pay Off Your Tax Bill
If you’re unable to pay the full balance of your tax liability right away, you have options.
“If you feel like you could put it on your credit card and they pay it off in the required 30-day time period, that’s one route,” says Mark Jaeger, vice president of tax operations at Tax Act. “The IRS does offer different types of installment agreements,” he says, noting that interest rates on these plans are around 4%, “which is a lot better than a credit card payment of 18% to 25% interest.”
— Get on an installment plan. You can apply to repay your tax bill in monthly payments. While you do, interest will continue to accrue.
— Request an offer in compromise. This allows you to settle your tax debt for less than the full amount owed. Filing an application is part of the process.
— File and pay what you can. The failure-to-file penalty is higher than the failure-to-pay penalty, so it makes sense to file your taxes and pay whatever you can. After this, work with the IRS to get on a payment plan or talk to a tax professional about your options.
— Request a hardship determination. If a bank levy instituted by the IRS is causing you economic hardship, the levy may be released.
[Read: What’s My Tax Bracket?]
Regardless of which repayment method you choose, it’s important for taxpayers to establish some sort of payment plan or official relief to prevent the IRS from taking or continuing enforcement action.
“Despite the perception of the IRS, resolving IRS back taxes is actually easier than it may appear,” Raanan says. “For back taxes, most taxpayers can either set up an affordable payment plan or receive a financial hardship approval from the IRS, which puts their back taxes aside until their finances improve. Other taxpayers may qualify for a penalty removal, a tax settlement or another type of resolution.”
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Do You Owe the IRS? How to Find Out originally appeared on usnews.com
Update 04/07/22: This story was published at an earlier date and has been updated with new information.
