Owe Back Taxes? 9 Tips to Help

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There's no shame in falling behind on your taxes, but bury your head in the sand and you'll owe even more.

In the age when many Americans are fighting to fend off foreclosure and battling credit card debt, now there’s another growing trend – The IRS is getting more aggressive about pursing people who owe back taxes.

The Internal Revenue Service (IRS) says that each year Americans cheat Uncle Sam out of about $290 billion in income taxes. That amount could pay for a full third of the recently enacted federal health care plan – and Uncle Sam knows it. That’s why the federal government is getting serious about collecting back taxes. (It’s also why, starting in 2012, every business will be doing a lot more paperwork to keep other businesses honest. See our recent story, On the Horizon: A Tidal Wave of New Tax Forms.)

If you’ve fallen behind on your taxes, you’ll be hearing from the IRS: receiving notices for late taxes, interest and penalties, or perhaps a Notice of Federal Tax Lien or a Notice of Levy. You can rule out running off to Acapulco, and burying your head in the sand doesn’t work – so what’s a tax delinquent to do?

1. Find out where you stand

First and most important, you’ll need to determine exactly how much you owe. Call the IRS or dig out copies of your tax returns to verify the amount you owe. Your total debt will include your original tax due, along with penalties and interest. If you agree with the amount owed, fill out Form 9465, the Installment Agreement Request. You can also use the irs.gov Online Payment Agreement Application to set up a payment plan.

2. Can’t Pay? Contact the IRS.

Taxpayers with problems paying back taxes can contact the Taxpayer Advocate Service, an independent organization within the IRS dedicated to providing free assistance to individuals who are experiencing financial difficulties. Taxpayers can call the Taxpayer Advocate Service at 877-777-4778. People struggling with tax payments can also seek help from local Low Income Taxpayer Clinics, which represent low-income taxpayers before the IRS; assist taxpayers in audits, appeals and collection disputes; and help taxpayers respond to IRS notices and correct account problems.

3. Paying over time

Assuming your overall tax debt doesn’t exceed $10,000, you’ll need to sit down and budget a monthly amount that will get your tax debt repaid within three years. (You can always pay more, but you should start with the minimum you are willing to pay every month.) You’ll select a day of the month to make your payments (the date must be the same every month) and you can opt to make automatic payments from your checking account or, if you prefer, via the Electronic Federal Tax Payment System, known as EFTPS. Once you’ve submitted your proposal, the IRS has 30 days to review and respond. But if you’ve met those criteria, the agency is required to accept your proposal.

4. Use EFTPS

The U.S. Treasury Dept. has an easy, online way to pay not only back taxes, but all of your taxes with the click of a mouse. The Electronic Federal Tax Payment System (EFTPS) is a free service from the U.S. Department of the Treasury. Since it began in 1996, millions of businesses, individuals, federal agencies, tax professionals and payroll services have used EFTPS.

All federal taxes can be paid using EFTPS. You can make payments via the website, a voice response system or special channels designed for tax professionals, payroll services and financial institutions.

EFTPS is available by phone or online 24 hours a day, seven days a week. You can schedule a business payment up to 120 days in advance or an individual payment up to 365 days in advance. Here’s the web page where you enroll.

5. Get professional help

If you need more time or lower monthly payments, consider enlisting some professional help. Find a qualified and reputable tax professional who can help you negotiate a lower monthly payment plan, and set up a payment schedule that you can live with. You can also try filing what’s known as an “Offer in Compromise,” which is basically a petition for you to settle your debt for less than what you actually owe. Your odds of getting off the hook this way are slim – less than 20% of OIC petitions are accepted – but if your circumstances are truly dire, you may stand a chance.

6. Watch for fraud artists

Beware of scam artists who will offer to assist you with an OIC. The only person you’ll want to hire is a tax attorney, CPA or EA (Enrolled Agent) who can provide you with excellent references. Having a tax professional represent you before the IRS will help ensure that all letters and phone calls from the IRS are handled quickly and professionally. If a tax-services company wants a big deposit up front, stay away. Also, don’t trust promises from companies that imply that you are “qualified” or “eligible” for an IRS program to resolve your back-tax debt. Only the IRS can make that determination.

7. Beware of “phishers”

Be particularly vigilant about companies that say they can help you, but want to get at your personal financial information instead. The scam is called “phishing” and it’s listed on the IRS’ list of “Dirty Dozen” tax scams. According to the IRS, “phishing is used by scammers to try to trick unsuspecting taxpayers into sending personal or financial information through email or other online means. These scammers have used emails, tweets (via Twitter) or phony websites to attempt to get this sensitive information from taxpayers.”

8. Don’t forget to file

If you haven’t yet filed all your tax returns, the IRS won’t approve your installment proposal. Before requesting a monthly payment plan, be sure that you’ve completed and filed all your back returns.

9. Above all, don’t panic

You’re hardly the first person to owe back taxes. As long as you’re making a good faith effort to repay, you’re on the right path. The key is to face up to your problems and address them as quickly and completely as possible.

The faster you resolve tax troubles, the faster you can get on with your life.

And remember: This isn’t the type of problem that goes away – it just gets worse. Check out this email exchange Stacy had several months back with someone in this position.

Stacy Johnson

It's not the usual blah, blah, blah

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