The Do’s and Don’ts of Handling Your Unpaid Taxes
While the summer months are a time to relax a little and forget our troubles, it’s also the right time to start preparing for tax season and getting on top of unpaid taxes.
With tax day coming up in the fall, anyone with a more complicated return should start getting their ducks in a row now.
Filing taxes can be a daunting prospect, but this pales in comparison to not filing them since the IRS is hardly known for being lenient about such matters. Nonetheless, a full 5% of all Americans fail to uphold their duties to Uncle Sam, either forgetting, failing, or wilfully refusing to file.
If you worry you’ll have unpaid taxes, or you already have unpaid or unfiled taxes from the previous season, don’t panic. Make sure to follow this essential list of do’s and don’ts to get back on track and avoid an IRS nightmare.
Table of Contents
Do Be Transparent About Unpaid Taxes
When it comes to all types of taxes, transparency is everything. If you have failed to file, you might have a good reason.
If so, get in touch with the IRS and explain your situation. Provide any and all evidence that supports your reason for failing to pay.
The IRS always operates on a case-by-case basis. While you won’t be able to avoid your tax dues, you can arrange a reasonable installment plan and avoid additional fees by being honest about your situation.
Do Get Your Documents In Order
As this detailed unfiled IRS tax returns page explains, Uncle Sam will usually pore over at least the past six years of your returns if you are flagged up for failing to pay.
The best thing you can do to stop this from becoming a nightmare situation is to get your documents in order covering this period, if possible. Gather your pay stubs, debt documentation, and previous returns.
Your ability to provide the correct documents in a timely manner will play a big role in how the IRS responds to your case.
Do Remember Self-Employment Requirements
If you are one of the almost 10 million Americans who are self-employed, it’s a whole different ballgame. You will need to provide much more detailed documentation to the IRS if they audit you for failing to file or pay, simply because your income will not be documented through pay stubs alone.
Remember, the IRS will take a look at your business themselves and take what they think they are owed. To stop them from putting you out of business, you need to provide a full list of all of your business deductions and outgoings.
This means supply bills, utility bills, rent costs, and even the square footage of your home office should be gathered up, as these will give Uncle Sam a fairer picture of your business’s incoming vs outgoings.
One thing that taxpayers fail to realize is that the IRS is always open for negotiation, in the right circumstances.
If you have been transparent about your failure to file and can provide a full overview of your finances, you can work out a fair payment plan or even negotiate tax relief.
You can set up a dedicated installment agreement directly with the IRS by filing a 9465 Form. There are also online tax services found via the IRS website where you can apply for a plan.
You can also request a short-term extension (up to 120 days) to pay the full balance of your unpaid taxes, which can help you avoid penalties and interest. If you are in dire straights, you can also apply for a so-called “hardship extension” and delay your repayments for a while.
Do Be Timely
With any dealings with the IRS, punctuality is very much appreciated. Any failure to respond on time to a request from the IRS over unpaid taxes will result in additional penalties, such as late fees or interest on your unpaid balance.
This will also weigh against you if the IRS decides to escalate and proceed to legal penalties or repossession. Always respond to any requests ahead of schedule whenever possible.
Do Pay Your Dues
This might seem easier said than done if you are struggling to meet your tax obligations, but it bears repeating.
It is absolutely essential that you pay what you can, and prioritize your obligations to the IRS over any other financial outgoings.
Remember, you can request several different repayment options with the IRS, and they will take your financial hardships into account when making a decision.
When you get a letter from the IRS, it’s natural for the alarm bells to start ringing, especially given the somewhat severe tone Uncle Sam uses in its communications.
However, try not to let that get to you, even if your situation seems severe. When you panic, you are more likely to bury your head in the sand and try to ignore the situation. This is the last thing you should do. Stay calm and read your notice carefully.
Remember to call a tax advisor if you are particularly worried. As a rule of thumb, you should also consider hiring a tax attorney if the amount of unpaid tax owed is greater than $10,000.
This might sound obvious, but it is incredibly important. Do not lie in your communications with the IRS. Ever.
If you lie about your finances or your reason for non-payment, it is more than likely that they will find out. They will dedicate investigators to your case and dig through your financial history with a fine toothcomb.
If they conclude that you have been dishonest, they will levy the harshest possible penalties. Stay calm, be honest, and remember to negotiate with the IRS in good faith. They are usually firm but fair.
Rebuild Your Financial Health
Unpaid taxes are not a personal failure. They can happen to the best of us, so what matters is how you respond to the situation.
By keeping your cool, being honest, and being ready to negotiate, you can avoid any heavy penalties and get your finances back on track.
Make sure to consult our own financial articles for expertly-curated insights on rebuilding your financial health, whatever the situation.