A reader wants to know how to pay off tax debt without getting in (more) trouble.
Question: OK, I screwed up and I know it. But I don’t know what to do now. I got laid off and then divorced last year, and I didn’t pay my income taxes. Any of them. Maybe the IRS hasn’t caught up with me because I was self-employed and my wife made most of the money. Now that I’m back on my feet and met someone else, I want to square this up with the IRS. I got no idea how, though.
I even went to the IRS website and typed, “I haven’t paid my taxes” into the searchbar. I got stuff that looks like this, about “Economic Stimulus Payments” and “Offer in Compromise.” All I really want to know is: How screwed am I?
— Andy in New York
Howard Dvorkin CPA answers…
Tis the season. Tax season. If last month was the Most Wonderful Time of the Year, we’re quickly approaching the worst. From now until April 15, I expect to receive many more urgent emails from confused but honest Americans like you, Andy.
Giving tax advice is a lot like giving legal advice: It shouldn’t be done without a direct consultation. However, I can give you some pointers that will guide you. Let’s break it down in plain English.
Step 1: Know the law and the reality
Technically, not paying your past taxes is a crime. It’s a misdemeanor, and you could be fined up to $25,000 for each year you don’t pay. Jail time is a possibility — up to a year.
Did I get your attention? Good, now take a long, deep breath.
“The IRS is much more interested in having you pay your taxes than sending you to prison,” Lawyers.com says. “As a result, the IRS rarely prosecutes anyone who comes forward voluntarily to remedy the problem.”
Obviously, you don’t want to wait until the IRS finds you. Onto Step 2.
Step 2: Know what the IRS does next
Once the IRS figures out you haven’t paid your taxes — and eventually, that happens — it will begin what’s known as the collections process. (You can learn more in our report, Understanding the IRS collection process.)
It starts with a letter. You’ll get a notice in the mail. Read them carefully, because it will spell out how much you owe and give you a deadline to pay it — and the IRS wants all of it at once. (You can avoid that by reading on.)
Don’t ignore this notice, because you’ll just get more. If you keep ignoring them, they’ll stop. Then something much worse happens: You can get hit with a federal tax lien. As we explain in our report, that lien is “the IRS’ claim to everything that you own and anything that you may own in the future while the lien is still in place.”
Then there are wage garnishments and bank levies. You really don’t want to go there. You can avoid all of this by moving onto Step 3.
Step 3: Getting help
Debt.com often offers two ways to solve your debt problems: do-it-yourself or professional help. For instance, when it comes to credit repair, we spell out both ways and let you choose. But when it comes to taxes, I don’t recommend you go it alone, unless you’re a tax attorney.
For instance, a professional tax consultant can help you with an installment agreement, which is a contract between you and the IRS to pay on monthly installments. That offer in compromise you mentioned earlier, Andy, allows you to settle your tax debt for less than you owe.
The rules are hard to navigate on your own, so I urge you read our Tax Debt section. Then fill out the form at the top right of this page or call 1-888-470-4531 for a free consultation. You can ask questions without being pressured to buy anything, and you can get answers in plain English. Good luck, Andy.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.