Owe the IRS? A Quick Guide on Navigating Back Taxes

So you look through your mail and find a letter from the Internal Revenue Service. When you open it, you find a bill for a six figure sum in back taxes, penalties and interest. What do you do now?

Step One
When you receive an unwanted letter from the IRS, try not to panic and don’t assume anything yet. While some taxpayers who get such a notice really do owe back taxes, the amount assessed is often incorrect. Many times the amount on the notice is far too high. Sometimes, when all is said and done, the IRS might even owe you something.

With the advent of computers and the requirement for many businesses to send both you and the IRS information on your interest, dividends, stock and other transactions, the IRS initiated a matching program. This program compares the information sent in by a third party with the information you report on your tax return. If you fail to include all of this information, the IRS assumes you understated what you received and sends you a bill – without taking into account any possible deductions that would reduce your taxable income.

Assuming you reported income correctly in the following years, you might actually have a refund coming. So don’t panic when you receive the IRS notice – just take a deep breath and read it carefully.

Step Two

Work to address your problem with the IRS. This could be as simple as making a phone call  to the IRS,or writing a letter. In a more complex case, you might need to engage a tax professional for IRS representation to help you correct any errors or file any income tax returns you have not filed.

One big mistake we see from taxpayers is failure to acknowledge a problem. In the case of the IRS, any bill you receive is a problem – whether you actually owe money or not.

All too often, a taxpayer will receive a notice claiming taxes are due and, if the amount is small, they will throw it in the trash and forget about the letter. If the amount is large, the taxpayer might assume the IRS is correct and go into denial. Either way, failure to follow up and communicate with the IRS can spell trouble. At the very least, the notices will continue. Assuming there is no fraud, notices will continue until the IRS finally places a lien on the taxpayer’s assets or levies their bank account. This tends to prolong the agony and might end up costing more to correct. The longer a taxpayer ignores the IRS, the less inclined collections will be to work with them.

Step Three
Once you have corrected your tax return or filed any delinquent returns, pay any taxes due or wait for the IRS to send you the refund. If, however, you owe a significant amount, you might need to work out a payment plan with the IRS. In that case, the IRS will require a substantial amount of information to determine your payment plan.

This is when a tax professional experienced with IRS collection laws and procedures is invaluable. They will look at your overall financial picture and help you present your case to the Internal Revenue Service. Your situation will dictate what you pay and whether you pay it in installments or in one lump sum. An experienced professional will be able to help you get the best deal possible.

Conclusion

The United States’ tax system is a voluntary one. That means the IRS first relies on you to compute your income and pay the taxes due. If you don’t, they have at their disposal some of the information necessary to file a substitute return for you – a return that is rarely correct and almost certainly does not take into account all legal deductions to which you are entitled. If you receive an IRS notice, especially one claiming you owe a substantial amount in taxes, give us a call. We are here to help.


Tene Thomas is a licensed CPA with more than 19 years of technical experience in tax compliance and is well versed in collection regulations and procedures. As partner of the tax and small business solution practice, Tene serves a myriad of industries. This diverse knowledge allows her to provide high quality and comprehensive services to clients with these specific tax and accounting needs.