I have a major tax liability, now what?
Updated: Sep 23, 2020
Do you owe the IRS thousands in back taxes? Perhaps you have a tax liability and you are looking for some tax help? Maybe you have heard of an offer in compromise and you are wondering if that might get rid of your tax penalty.
There are several reasons why you might owe the IRS, such as failure to file a tax return, failure to pay a tax liability, late or underpayment penalties, and interest on a tax debt. Perhaps you just received an IRS notice and you don't know where to begin. Here is some general information to help you get started.
1) Get current on your tax filings. If you have any tax year where a tax return has not been filed or the IRS has filed an SFR (Substitute for Return) on your behalf, you need to file an original return for that year as soon as possible. If you are not current on your filing requirements, none of the additional steps will be available to you.
2) Penalty Abatement. This is when the IRS will remove penalties from your tax account. The taxes owed are not removed and interest is not removed (directly), but the penalties can be removed. Interest is removed indirectly when a penalty is removed because the interest was charged partially on the penalties and partially on the tax debt itself.
a) First Time Penalty Abatement. This is a statutory penalty abatement. If you meet the requirements for this relief, you get it. This is a "silver bullet" in essence and can remove thousands of dollars in penalties from your tax account. You can only use it once in your lifetime, so you want to make sure you use it wisely and apply it to the best year in which it's available.
b) Reasonable Cause. If you do not qualify for the first time penalty abatement, it's possible to get your penalties removed due to reasonable cause. The IRS actually uses artificial intelligence to help determine if penalties will be abated under reasonable cause, but there is some subjectivity here and the IRS workers have some discretion as well. A few reasons you may be able to successfully receive penalty abatement for reasonable cause are fire, casualty, or natural disaster; inability to obtain records; death, serious illness, incapacitation of the taxpayer or immediate family; or another reason which establishes you used all ordinary business care and prudence to meet your tax obligations but were nevertheless unable to do so.
If you owe the IRS thousands of dollars, it is very possible that half of your tax debt (or more) is from penalties and interest, not the tax liability itself. By getting the penalties abated (and therefore some of the interest removed indirectly), you can potentially get your tax debt to a much more manageable balance.
The taxes owed are different than the penalties. If you disagree with the IRS on the additional tax assessed, that's a topic for a different article. If there is no legal dispute on the taxes owed, then you have two more options related to the taxes themselves.
3) Payment plan. If you qualify, you can set up an installment agreement or payment plan with the IRS. Generally speaking there are three options (you may not qualify for some of them). 1-Full payment, 2-Short-term payment plan (paying within 120 days or less), and 3-Long-term payment plan (paying in more than 120 days).
You might be thinking... "That's great, but I don't want to (or I CAN'T) pay these taxes". Unfortunately, if there isn't a legal reason in the tax code for why you do not actually owe the taxes, the best you can typically do is get the penalties removed. You will have to pay your taxes. If you don't, the IRS may issue a levy (seizure of your property to satisfy the debt, such as assets in a bank account), a lien (a legal claim against your property), or a wage garnishment / levy (seizure of your wages, withheld by your employer and sent directly to the IRS).
However, some people can qualify for an offer in compromise. Many commercials make this sound like a slam dunk, easy way out of paying tens of thousands in taxes, but in reality it isn't that easy. In order to qualify you have to own very little, make very little, and expect to continuing having and making very little.
4) Offer in compromise. This is an offer to the IRS to pay less than the full amount of taxes owed. The IRS is assessing whether or not they believe they can collect the full amount owed. If they think they can collect the full amount, they likely won't accept an offer in compromise. And remember, they have levies, liens, and wage garnishments to help them collect. This is a lengthy, in depth application that factors in your ability to pay, income, expenses, and asset equity in order to determine whether or not an offer in compromise will be accepted. You will typically need to pay a lump sum amount with the offer in addition to the application fee as well as make a promise to pay the 'offered amount' within a certain period of time after the agreement is accepted and if it is accepted.
If you fall out of compliance (fail to file a return, miss a payment, etc) within a certain number of years after having an offer in comprise or a payment plan accepted, these can be revoked by the IRS and the full tax debt can be added back to your tax account.
You should work with a CPA or Tax Attorney if you are facing issues with tax debt, tax notices, or any other type of tax liability. If you need help, click here for more information.
Read more about me. I enjoy helping individuals with their taxes, businesses (including nonprofits and churches) with tax or accounting and other finance related questions, and I also enjoy helping people resolve tax debt, liens, levies, or other tax help you may need. I live in Lake Nona in Orlando, Florida, but I serve clients all across the country. Schedule an appointment if you need assistance and take a look at the resource page.
*The blog posts (as well as the YouTube channel) are my personal opinions and thoughts about a wide range of topics. They are not meant to apply to individuals specifically and should never be relied on as tax or investment advice. You should contact a professional for specific advice before taking action.
Penalty abatement, payment plans, and offers in compromise are complex and are not guaranteed. This is not tax advice. I have provided this article as a general overview. You should reference other sources such as IRS.gov for more information and hire a qualified professional to help you with your tax debts.