What procedures the IRS will follow to collect a tax liability that you are presently unable to satisfy? In general, the IRS attempts to collect unpaid taxes first through voluntary arrangements and, if that fails, through the use of enforced collection methods.
If you believe the bill is erroneous, you should immediately reply in writing to the IRS office from which the bill was sent. Copies of any records which would help in correcting the error should be included. If the IRS concludes that you are correct, it will adjust your account and issue a corrected bill.
If you are not disputing the amount of the liability, but simply are unable to pay your bill in full, you have several options to consider. As outlined below, the IRS has strong powers which it can use to enforce collection of the debt, including seizing your personal or business assets. To avoid this, you should first consider attempting to work with the IRS to come to a mutually satisfactory payment arrangement, either through an installment agreement or an offer in compromise. Secondly, under limited circumstances, the IRS will temporarily stop collection actions if this causes a hardship to yourself or your family. Thirdly, you can consider bankruptcy.
Enforced Collections: When voluntary means fail, the IRS has a formidable array of powers to enforce collection. The IRS' authority to take enforcement action arises 10 days after the first notice and demand for payment of the unpaid tax. Enforced collection action includes the filing of a Notice of Federal Tax Lien, the serving of a Notice of Levy and/or the seizure and sale of your property.
Normally, the IRS sends three or more notices asking for voluntary payment of the tax before any enforcement actions are taken. If you have not contacted the IRS by this time, the IRS sends a notice of intent to levy by certified mail. Thirty days later, the IRS may begin enforcement actions.
The IRS may place a lien on your property. The IRS may also seize (levy on) your property. Levy can be made on property in the hands of third parties (employers, banks, etc.) or property in your possession (automobile, house, etc.). Certain property cannot be levied upon: a limited amount of personal belongings, clothing, furniture, and business or professional books and tools; unemployment, worker's compensation, certain welfare benefits, and certain pension benefits; court-ordered child support payments; undelivered mail; and a small portion of wages.
After seizure, the IRS can sell the property to satisfy the tax bill. The IRS will give you notice before the sale of the property. The sale is canceled if you redeem the property before the sale, or make other arrangements to pay the tax bill.
Installment Agreements: If you cannot pay the bill in full, the IRS should be contacted in order to make other payment arrangements. The IRS may request you to submit a complete financial statement to help determine how you can pay the amount due. The IRS may request that you sell, mortgage, or use assets as security for a loan to pay the taxes. The IRS may enter into an installment payment agreement with you, or may request that you agree to have your employer deduct an amount from your wages and send it to the IRS. If the IRS determines that you cannot make any payments, it may temporarily delay collection until your financial condition improves.
Offer in Compromise: You also have the right to submit an offer in compromise. The IRS may compromise a tax bill on one or both of two grounds: (1) doubt as to the liability for the amount owed or (2) doubt as to ability to make full payment of the amount owed. The doubt as to the liability for the amount owed must be supported by evidence and the amount acceptable to the IRS depends upon the degree of doubt found in the particular case. In the case of inability to pay, the amount offered must exceed the total value of your equity in all your assets, and must give sufficient consideration to present and future earning capacity. If an offer is accepted, the IRS may also require you to agree to pay a percentage of future earnings as part of the offer and to relinquish certain present or potential tax benefits.
Hardship: If you can show that collection of the tax debt would cause a hardship for you or your family, such as preventing you from meeting necessary living expenses, the IRS will defer its collection actions. Then, after about one year, it will review your case to determine if the hardship still exists.
Bankruptcy: You may also consider bankruptcy. The filing of a bankruptcy petition effects a stay on further IRS collection actions. The IRS may then file a claim for the unpaid taxes with the bankruptcy court. The court can determine whether and when these taxes are to be paid. In addition, certain taxes which cannot be paid from the bankruptcy estate may be discharged. Discharge is generally limited to taxes incurred more than three years before the bankruptcy petition is filed. Before filing for bankruptcy, however, you should first consult with me so that we may consider all the consequences of this act of your financial picture.
Please call us to discuss the options outlined in this letter. We would be glad to assist you in arriving at the best solution possible in your circumstances.