Everyone must deal with taxes, but tax law can be complicated — and there can be significant consequences for those who pay late, underpay, or otherwise make a mistake. The experienced tax attorneys at Damiens Law have put together an IRS collections and taxes FAQ to clear up some common doubts.
For more information, and for answers to your specific questions, you can call (662) 442-4423 in Mississippi or (901) 499-4466 in Tennessee.
The collections process
The collection process begins when the IRS sends a bill to the person who failed to pay the full amount owed in taxes after filing a tax return. It only ends when the person settles the account or when the IRS is no longer legally entitled to the account.
Q: How does the IRS notify taxpayers about collections?
A: Taxpayers receive their first notice as a letter. This provides information about the amount of tax due as well as penalties and interest based on the date the original balance is due.
Q: How do late penalties work
A: Unpaid taxes are subject to a daily interest rate and monthly penalty (which is capped). To minimize the amount they need to pay, taxpayers should try to pay their balance in full as soon as possible.
Q: What should taxpayers who cannot afford the penalties do?
A: Taxpayers may incur lower fees with a cash advance from a credit card or a loan than with the compounding interest rates the IRS sets. Taxpayers who are unable to acquire enough this way may be able to utilize a payment plan. Those who owe up to $100,000 may qualify for a short-term payment plan, which gives the taxpayer 180 days to pay the full balance. To receive more than 180 days, taxpayers can apply for an installment agreement. Either option is available by applying with the IRS online.
Before considering a payment plan, however, it is worth fully understanding your options. You can talk to a dedicated tax attorney at Damiens Law to discuss if there are any alternatives available to you.
Q: What information does the IRS need to determine how much a taxpayer can pay?
A: If the IRS needs to determine how a taxpayer will be able to make payments, it will request the individual’s or business’s financial information. This usually involves the taxpayer filling out one of three Collection Information Statement forms:
- Form 333-A is for self-employed workers and wage earners.
- Form 333-B is for business owners who have business tax debt.
- Form 333-F is for determining if a self-employed worker or wage earner is eligible for a payment plan. It is similar to Form 333-A, but it has two pages rather than six.
Q: What can taxpayers do if they are unable to pay any tax debt?
A: Sometimes, it is possible to temporarily delay the collection process. The IRS may ask the taxpayer to submit one of the above Collection Information Statement forms to determine if this is the case. It is important to note that debt still continues to increase with a temporary delay, due to penalties and interest.
Private debt collection
When the IRS is unable to collect unpaid taxes itself, it often assigns accounts to private collection agencies (PCAs). These companies assist the IRS in acquiring overdue taxes.
Q: When can the IRS assign an account to a PCA?
A: The IRS may use a PCA if it cannot find a taxpayer (or it has insufficient resources to locate the taxpayer), when a taxpayer has failed to respond for one year, or when an assessment occurred two years ago, and the account has not been assigned for collection.
Q: What do PCAs do?
A: PCAs arrange payments to allow taxpayers to fully pay their debt to the government within seven years or by the time the collection expires. Taxpayers will receive a letter from the PCA explaining that the company is a contractor of the IRS.
Q: How can I verify that a PCA is legitimate?
A: The IRS always notifies taxpayers through a Notice CP40 letter before it assigns a PCA to an account. Taxpayers can also see that the IRS has assigned them a PCA by requesting a copy of their IRS account transcript.
There are also ways taxpayers can detect scammers posing as PCAs. For instance, a legitimate PCA will never ask for direct payments or payments via gift cards, request the taxpayer’s financial information, or charge for payment agreements.
Paying estimated taxes
Collections are often due to a taxpayer failing to pay estimated taxes. Knowing when and how much they are due to pay can help taxpayers avoid future liabilities.
Q: Who needs to pay estimated tax?
A: Workers who expect to owe at least $1,000 on their tax returns need to pay estimated tax. However, they often do not need to do anything themselves, as it is common for employers to withhold taxes from their earnings. Corporations also need to pay estimated taxes, although they should do so if they expect to owe $500 or more. The IRS provides more information about withholding taxes for individuals in Form 1040-ES and for corporations in Form 1120-W.
Q: When are estimated taxes due?
A: Estimated taxes are due every year on:
- April 15 to cover January 1 to March 31
- June 15 to cover April 1 to May 31
- September 15 to cover June 1 to August 31
- January 15 to cover September 1 to December 31 of the year before
If the due date is a weekend or holiday, taxes are due the following business day.
Q: When should taxpayers check withholding?
It is important that taxpayers check their withholding is correct every year. They should also recheck after a major life change, such as a new job, marriage, birth or adoption of a child, change of income, or home purchase.
Q: What is the penalty for underpaying estimated taxes?
A: There is typically a penalty for underpaying estimated taxes if the amount the taxpayer owes is $1,000 or more. However, taxpayers can avoid penalties if they have paid at least 90 percent of their owed tax or the entire amount listed on their tax return from the previous year (the smaller amount of the two applies).
Penalties differ for farmers, fishermen, and some high-income taxpayers. This information is available in the Special Rules section of Publication 505.
Refusing to pay IRS collections and taxes FAQ
If a taxpayer refuses to pay taxes or file a tax return, there are several things the IRS can legally do.
Q: What are the enforced collection actions the IRS can take?
A: Taxpayers who fail to pay their taxes on time and who do not notify the IRS why they have not paid may experience an enforced collection. The IRS may issue a notice of levy, use a trust fund recovery penalty, or issue a summons.
Q: How can the IRS seize property through a levy?
A: The IRS is legally entitled to seize the property of a taxpayer who has tax debts through a levy. As well as garnishing wages and taking funds from bank accounts, the IRS can seize vehicles and real estate. Taxpayers receive notification in a bill called Final Notice of Intent to Levy and Notice of Your Right to a Hearing.
Q: What the difference between a levy and a lien?
A: Before the government takes property through a levy, the IRS makes a legal claim against the property. A lien secures interest in the property, whereas a levy seizes the property.
Q: How does the IRS sell taxpayers property?
A: After the IRS seizes a property, it publishes a notice of pending sale in local media and sends an original notice of sale to the taxpayer by certified mail. After a minimum of 10 days, the IRS may conduct a sale (with the exception of when the IRS is selling perishable property, in which case there is an immediate sale). The minimum bid is usually at least 80 percent of the forced sale value. If the proceeds of the sale end up being less than the amount owed, the taxpayer will need to pay the difference. However, the taxpayer will receive a refund if the proceeds are more than the tax bill.
Q: What is a trust fund recovery penalty?
A: Anyone who is responsible for collecting or paying withheld income or employment taxes needs to pay trust fund taxes. These taxes remain in hold in the trust until the person makes a federal tax deposit. Willful failure to collect or pay trust fund taxes can lead to assessment for a trust fund recovery penalty (TFRP).
Q: When can the State Department deny or revoke a passport?
A: The IRS can involve the State Department when a taxpayer is seriously delinquent. As well as denying new passport applications in these cases, the State Department can revoke current passports. Taxpayers who are abroad at the time may receive a limited validity passport to enable them to return to the country.
Contact an experienced tax attorney to learn more
If you have any queries that are not answered in this IRS collections and taxes FAQ, talk to an experienced and dedicated tax attorney at Damiens Law. Call (662) 442-4423 for Mississippi or (901) 499-4466 for Tennessee.