We all know the IRS can be a nightmare to deal with if you owe back taxes. Their authority is significant and their ability to make your life miserable is well known. It is important to know exactly what the consequences could potentially amount to if you owe Uncle Sam.
The first step you should always take is to file your tax return on time even if you owe money and can’t afford to pay it right away. Avoiding the IRS altogether is never a good idea, and while you may be good at ignoring them, they will not offer you the same disregard. It may take them several weeks to process your return and realize that you owe them, but once they do they will exercise every authority to collect.
While we have all heard horror stories of collection attempts, the IRS actually has a clearly defined process it must follow when attempting to collect back tax money that is owed to them. (See “The IRS Collection Process: Publication 594”) One thing you can bet on is that if your taxes are not paid each year by April 15th, you will have penalties and interest added on to that outstanding balance. These extra costs can add up fast too – sometimes up to 25% of the original amount owed in less than 6 months! Additionally, any future State or Federal returns you have coming to you will be intercepted to pay off your balance.
The first action the IRS will take is to send you 2-3 computer generated collection letters over the course of 5-6 months. These bills state the amount you owe and for which tax year(s), along with the due date of when they expect you to pay in full. At this point you must either pay the balance in full or contact them directly to either dispute their calculations or to set up payment arrangements. According to their website, their goal is “always to work with you to resolve your case before we have to take collection actions.”
If you fail to pay the balance due and don’t get around to contacting them to make arrangements, they will begin collection actions. These actions are the center point to any IRS horror story and since the IRS has 10 years from the date the tax was assessed to collect the balance due, they have plenty of time to make your life miserable.
Federal tax lien
The most common next step the IRS uses to collect is to file a Federal tax lien against your bank accounts. Even though this action won’t occur until after they have spent over 6 months trying to contact you, it still takes many people by surprise when they find out their bank account has been cleared out overnight.
Once again, the IRS will contact you via written notice with their intent to take action in this manner. If you receive a letter stating that they intend to file this lien, you generally have 30 days to act before they take action.
Garnishing your wages
Garnishing your wages is yet another tool the IRS can implement to collect past due amounts owed to them. This adjustment to your paycheck can be financially devastating to your household income, usually taking somewhere between 30-75% of your NET paycheck before it makes it into your hands.
The IRS legally requires an employer to comply with their collection efforts and the wage order stays in effect until the IRS releases it, usually not until the entire amount owed to them has been collected.
In some extreme cases, people have lost their home or other property because of past due tax debts. Although property seizure is one method that the IRS can use to collect amounts owed, it is usually a last resort for them.
While having to file your taxes each year can be something that many of us dread, it is a far better alternative to finding yourself on the wrong side of compliance when it comes to the IRS. Indeed, Uncle Sam does have an excellent reputation for being relentless in his pursuit to collect what is owed to him.