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What to do if the IRS Says That You owe Back Taxes

It can be terrifying to receive a letter from the Internal Revenue Service (IRS) claiming that you owe back taxes. There are some important steps that you should take if you receive IRS correspondence of this kind.

SHOULD YOU IGNORE THE LETTER?

NO!! It can be so overwhelming to receive an IRS demand for the payment of back taxes that many people ignore the letter, throwing it in a drawer or a shoe box to deal with “someday.” While this is a common reaction, and completely understandable, it can lead to serious consequences when it comes to trying to resolve the issue with the IRS.

The first thing to do when you receive a letter from the IRS stating that you owe back taxes is to read the entire letter. There will likely be a specific date by which you must respond to protect certain due process rights that you have. If you do not respond within those time periods, you may lose certain rights that can help you resolve the IRS issue more advantageously.

So, the first tip in responding to the IRS is to determine what the deadlines are and respond to the IRS in a timely manner. If you are not sure from the letter what the deadline is or how to respond, you can visit with a tax attorney who can help you understand the process and draft a response to the IRS to file before the deadline, thereby protecting your taxpayer rights.

IS THE IRS CORRECT?

After determining if there are any applicable deadlines, the next thing to do when the IRS says that you owe taxes for previous years is determine if the IRS is correct. You can do this by checking the amount against the tax return that you filed for the year in question. If the amounts are different, you can have a tax accountant or a tax attorney review the discrepancy and discuss which amount is correct.

If you did not file a return for the year at issue, then you should have a tax preparer or tax accountant prepare the return correctly. You may find, at this stage, that the amount the IRS is demanding from you is correct or you may find that the IRS actually owes you money! This may be the case because if you did not file a return but you have large deductions, the deductions would not have been factored into the tax calculation by the IRS.

IF THE IRS IS CORRECT

If the amount demanded by the IRS is correct, you have various options. If you have the means to pay the amount in full right away, you can do that, which will stop interest from accruing. If that is not possible, you can propose a plan to pay the liability over time (an “installment agreement”) or a lump-sum payment that is less than the full amount owed (an “offer in compromise”). Finally, in some circumstances, the IRS will put an account in “non-collectible status,” which means that the IRS will not pursue payment at that time, but the account will continue to accrue interest, with the IRS following up every two or three years to see if the taxpayer’s financial circumstances have changed, allowing payment of the debt.

A tax professional can help you through this process by interacting with the IRS on your behalf. This can be particularly helpful if you intend to propose an installment agreement or an offer in compromise or if you do not have the means for either of those approaches and prefer pursuing non-collectible status.

IF THE IRS IS NOT CORRECT

If the IRS is not correct, you can present your arguments to the IRS and hope that they agree with you. It can help to have a tax professional represent you. The process of dealing with the IRS can be complicated and a professional can help you avoid procedural mistakes and advocate for your position.

Though it may take some time, a decision about the amount owed will be eventually be made. In many cases, if the IRS does not immediately agree with your argument, you may be able to appeal to a different group within the IRS, called IRS Appeals, that will further review the situation. If the IRS still does not agree with you, you may be able to take your case to the United States Tax Court, which meets in various locations throughout Idaho.

REQUEST PENALTY ABATEMENT

Provided that you have not had any problems with the IRS in the previous ten years, the IRS will often waive the penalty associated with the underlying tax for the first period at issue. For example, if the IRS is claiming that you $25,000 for 2018 and $35,000 for 2019 and you did not have any problems for the ten year period prior to 2018, the IRS may abate, or waive, the penalty associated with the 2018 liability. This depends on the circumstances of the case, but the IRS will often waive that penalty as a courtesy.

GETTING HELP

If you are facing a claim of back taxes by the IRS, it can help to have a professional in your corner to help answer questions and provide guidance. Call us toll free at 877.232.6101 or locally at 208-232-6101 for a free thirty-minute consultation. You can also email tax attorney Dave Bagley directly at dave@racineolson.com or call him on his direct line at 208-478-3475.

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