Finding a Tax Relief Lawyer

4 Common Types of Tax Debt Help

If you find yourself in a bind with your tax situation, it’s smart to understand the processes and options available to you in different scenarios. Here are four common tax issues and how they impact your financial obligations to the IRS.

IRS Installment Agreement

An installment agreement with the IRS is a payment plan that lets you pay your owed taxes over an extended period of time. There’s also an option for paying your taxes over a short-term period, which allows you to avoid paying a user fee.

A long-term installment plan is anything that takes more than 120 days to pay back. In order to setup the plan, you’ll need to pay a fee, which ranges based on how you sign up and whether or not you qualify as low-income.

The fee is added to your tax bill, as are any penalties you’ve accrued. Additionally, your balance will accrue interest until you pay off your balance in full.

Eligibility Requirements

In order to qualify for a long-term installment agreement with the IRS as an individual taxpayer, you must owe no more than $50,000. This includes penalty and interest in addition to your tax liability.

For a short-term payment plan, you must owe less than $100,000 in combined taxes, penalties, and interest in order to qualify. 

Applying online is the least expensive option but you can also apply by phone, mail, or in person. Whichever method you choose, you’ll need to include the following information in order to process your application.

Name: Make sure it’s listed exactly as it appears on your tax return

Email address: Must be valid.

Mailing address: Should be the same address used on your tax return

Personal information: This includes your date of birth, filing status, and social security number (or individual tax ID Number, if applicable).

Identity Verification: You’ll need one of three things to confirm your identity with the IRS. Your options are a financial account number, a mobile phone registered in your name, or an activation code that you can get via postal mail. The last option takes 5 to 10 business days to receive.

IRS Audit Process and Penalties

You can be audited by the IRS for a number of reasons, including because of random selection, straying from statistical norms, or as part of a related examination involving someone else.

If you are in fact selected for an audit, you’ll receive notification from the IRS through the mail. You’ll then receive a request to have your records removed either by mail or as part of an in-person interview. They’ll tell you exactly what documents need to be provided, but here are some common ones:

• Receipts
• Bills
• Canceled checks
• Legal papers
• Loan agreements
• Logs or diaries
• Tickets
• Medical and dental records
• Theft or loss documents
• Employment documents
• Schedule K-1

Typically, requests go back for three years of records, although it can go up to six years in some cases. The timeframe of the audit depends completely on the type of issues being looked at, how available all involved parties are, and whether or not you agree with the results.

Common Reasons for Being Audited

Whether your tax errors were intentional or not, there are several reasons why the IRS may choose to initiate an audit of your returns.

• Math errors
• Failure to report total amount of income
• Reporting excessive losses
• Reporting too many deductions, including donations and expenses
• Excessive rounding

Make sure you carefully review your tax return before you submit it. Using a tax software or tax preparer can help avoid mistakes. But it’s also important to be honest and keep records to substantiate your return.

Potential Audit Penalties

The potential for a penalty increases greatly when you’re audited. The exact penalty depends on what kind of decision is reached by the IRS during the audit process.

Here are some of the most common penalties resulting from an audit. The exact amount or percentage depends on the specific details of your case, but you can get a general idea of what you may incur.

Inaccuracy: An inaccurate tax return can result in a penalty between 20% and 40% of the total understatement.

Civil Fraud: If you’re found to have committed civil fraud, you’ll likely receive a penalty of 75% of the unpaid tax that was considered fraudulent.

Fraudulent Failure to File: This is a much less common scenario that is linked to tax evasion. The penalty is 15% per month of failing to file, totaling a 75% penalty after five months.

Interest: On top of receiving penalties, you can also earn interest on your penalties if you haven’t paid by the due date.

Offer in Compromise

Some taxpayers may be able to settle their tax debt with the IRS for a lesser amount that what they currently owe. The test for whether or not you qualify largely depends on of paying your tax bill in full would create a financial hardship in your life. Here are some of the factors the IRS considers when determining of you qualify for an offer in compromise:

• Income
• Ability to pay
• Expenses
• Asset equity

The IRS urges that you consider other payment options before sending them an offer in compromise. A tax lawyer or other professional may be able to help you submit a strong offer. Typically, the IRS will accept the OIC if they think that is realistically the most money they’ll be able to collect from you within a reasonable time frame.

Clearly, that’s not an exact formula, so professional assistance could be worth it in this scenario.

The process for submitting and offer in compromise is found in booklet form. It includes several forms you need to fill out, plus a non-refundable $186 application fee and a non-refundable initial payment. You’ll need one initial payment for each individual and business tax debt you owe.

Offers (and your corresponding initial payment) can either be paid as a lump sum of cash or as a periodic payment. The fee and the payment you submit with your offer in compromise well be applied to your tax liability, so be sure to designate with year and specific debt you’d like it applied to.

For accepted offers, you must meet the offer terms, including filing returns and making your payments. Once those terms are satisfied, any existing federal tax liens will be released.

For rejected offers, you can appeal within 30 days.

Wage Garnishment

In extreme cases of unpaid taxes, the IRS can levy your wages directly through your employer in order to satisfy your debt. Unlike other creditors, they don’t need to get a court judgment before implementing wage garnishment. Typically, you can have as much as 15% of your paycheck garnished by the IRS, though the exact amount depends on your standard deduction and total number of dependents in your household.

Before this happens, however, you’ll receive alternative payment options to try and avoid this extreme situation. You’ll also receive plenty of advance warning from the IRS to help you make other arrangements or prepare for the wage garnishment.

You can get the wage levy released in a few different circumstances, which include:

• Paying your owed amount
• Collection period ending before levy was issued
• Starting an installment agreement that doesn’t include wage garnishment
• Undergoing an economic hardship because of the levy

Not only does wage garnishment impact your finances, it could also impact your job. The IRS works directly with your employer to take out the wages before they even reach you in your paycheck, so your employer knows exactly what’s going on.

While the Consumer Credit Protection Act states that an employer can’t fire you because of one wage garnishment, there’s no rule protecting you if you have two or more. This can be from the IRS or any other court judgment. The more precarious your tax situation, the more likely you could be to lose your job, especially if you don’t have a strong relationship with your current employer.

No matter what you job situation may be, wage garnishment can do lasting damage to your finances so do your best to work out another solution with the IRS before getting to this point. If you can’t, consider hiring a tax attorney to help you figure out the best way to move forward in your situation.

Frequently Asked Questions

by Lauren Ward

Personal Finance Writer

Lauren Ward is a personal finance writer with nearly ten years of experience covering topics like loans, credit, and real estate. She lives in Virginia with her husband and three children.