I am faced with a tax bill that I can't pay. Am I completely at the IRS's mercy, or do I have some options?
Here are some options for dealing with a tax bill you unquestionably owe:
- Borrow from a financial institution, family, or friends and pay it in full.
- Negotiate an installment payment plan with the IRS. Interest and penalty charges will continue to accrue on the unpaid balance.
- Make an offer in compromise. That is, ask the IRS to accept less than the full amount due. Interest and penalties will continue to accrue.
- Reduce, eliminate, or pay the debt through bankruptcy.
- Ask the IRS to designate your debt (temporarily) uncollectible for economic hardship if you are out of work or your income is very low. This will buy you time to get back on your feet before dealing with the IRS. Interest and penalties will continue to accrue.
- Wait for the statute of limitation on the collection to expire.
I made a mistake on my tax return and am now being billed for the taxes, plus interest and penalties. Do I have to pay it all?
Maybe not. The IRS must charge you interest on your tax bill, but penalties are discretionary. The IRS abates (cancels) one-third of all penalties it charges. The trick is to convince the IRS that you had "reasonable cause" (a good excuse) for failing to observe the tax law. Examples that might work include:
- serious illness or a death in the family
- destruction of your records by a flood, fire, or other catastrophe
- wrong advice from the IRS over the phone
- bookkeeper or accountant error, or
- your being in jail or out of the country at the time the tax return was due.
Start the process immediately. As soon as you receive a tax bill with penalties that you don't want to pay, write back and ask for an abatement. The best way to get the IRS's attention is to use IRS Form 843, Claim for Refund and Request for Abatement. You can also send a letter explaining why you incurred the penalty. Be sure to attach a copy of the IRS notice showing the penalty and any other documentation that helps explain your situation.
Can the IRS take my house if I owe back taxes?
Yes, but the Taxpayer's Bill of Rights discourages the IRS from seizing primary residences. Also, the IRS doesn't like the negative publicity generated when it takes a home. Furthermore, IRS collectors cannot decide on their own to seize your home. The IRS must first get a court order, which you can contest.
Nevertheless, if the IRS collection division has tried -- and failed -- to get any cooperation from you (for example, if you have not answered correspondence or returned phone calls, lied about your income, or hidden your assets), the IRS may go after your residence as a last resort.
Can the IRS charge me interest if I was incorrectly sent a refund and the IRS now wants it back?
It depends. The Internal Revenue Manual states that "taxpayers should not be held liable for interest on ... erroneous refunds if the IRS was clearly at fault ... and the taxpayer is cooperative in repaying." If you caused the refund and can't afford to repay it, however, the IRS can charge interest from the time it requested the repayment.
How legitimate are the seminars and books by "tax experts" claiming you don't have to pay income taxes?
Not at all. Constitutional arguments against the tax laws are routinely struck down by U.S. federal courts. Typical scams involve multiple family trusts, limited partnerships, and offshore banks. While these schemes can confuse and slow down the IRS, they are bogus, period. Would a federal judge -- whom you will appear before if you are prosecuted for tax evasion and whose salary comes from the federal government -- ever be likely to uphold one of these schemes? We think not.
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