If you don't pay your taxes in full when they are due, the IRS and/or state tax authorities will add penalties and compounding interest to your existing tax debt and continue to pursue that debt (and add monthly penalties and interest on those penalties!) until the entire debt is paid off, they can no longer legally collect the debt, or they concede that they won't ever be able collect the full amount from you and agree to an Offer in Compromise.
Your first instinct may be to hide and ignore letters about your tax debt. Don't do that. The IRS isn't out to ruin your life (though it can); it just wants its money. If you are proactive, it is often possible to reach some kind of agreement with them so that you can eventually pay off what you owe them while meeting the other important ongoing financial obligations, like paying your rent or mortgage, basic living expenses, alimony, child support, and so forth. The problem is that the IRS collections process is like a maze and can confuse taxpayers who want to get their situation under control.
In some cases it may be possible to request an installment agreement with the IRS in which you can pay off your tax debt in monthly installments, including through direct debit. If you can't pay in full under a standard installment agreement, you can propose a partial payment installment agreement. You may also be able to defer payment by having your account moved to Currently Not Collectible (CNC) status. These payment plans require evidence of your current financial situation, including your income, expenses, and assets; members of the Armed Forces may also be able to defer payment. Not all applicants qualify, and even those who do qualify still must deal with the fact that their outstanding tax debt will continue to accrue penalties and interest until paid in full. Another option might be to propose an Offer in Compromise, which would allow you to pay less than the full amount of your tax debt if the government agrees this is their best option.
If you do not make arrangements with the IRS to pay your tax debt voluntarily, it has the legal right to take additional steps to satisfy the debt. To begin with, it can claim any federal income tax refund to which you may be entitled. Say you owe the IRS $10,000 in back taxes, interest, and penalties, and you're due for a federal tax refund of $2,000. In that case the IRS will take those refunds and put them toward your debt, leaving you with in $8,000 outstanding debt (plus further penalties and interest, of course).
More seriously, if you fail to pay your tax debt in full within ten days after the IRS sends you a demand for payment, you may be served with a Federal Tax Lien, which is a legal claim to your property (including any property you might acquire after the lien arises). The IRS files a public document called a Notice of Federal Tax Lien to alert your creditors that the government has a legal right to your property, such as your house and car(s). At this point the government is not actually trying to seize your property, only to assert its legal right to it, since you owe them money. In practice, having a tax lien makes you toxic to potential lenders (like credit card companies and banks) and perhaps to potential employers and landlords as well. It will be impossible to sell or refinance your home until the lien is satisfied, either by paying off your tax debt in full (including lien recording fees) or having the lien removed. For example, the IRS can be persuaded to remove the lien if they are convinced that will let you pay off your tax debt more quickly, or is in your best interest (for example, due to an unusual hardship circumstance) or their best interest, or because they may no longer legally collect the taxes you owe them, or because of an administrative error. In particular, entering into an installment agreement (see above) will allow the IRS to remove the lien.
However, most of the time the IRS won't serve you with a Federal Tax Lien immediately, but rather will first mail you a "Notice of Intent" letter that they are planning to file the lien, which also comes with a right to a Collections Due Process (CDP) hearing. The CDP hearing is an excellent opportunity to deal with IRS Appeals about the underlying debt, but most taxpayers don't file a timely request for the hearing (within 30 days). Deadlines matter with the IRS. When you put things off, it limits your options. If you have received a "Notice of Intent" letter about a tax lien, it is important to take action immediately to prevent the lien from being served. This is one reason that Gold Path Tax offers expedited service to clients who are facing the possibility of a tax lien.
The most frightening letter you can get from the government is probably IRS Notice CP504 ("Notice of Intent to seize (levy) your property"), also known as a Notice of Levy. This warns you that if you don't pay the IRS in full or contact them to make payment arrangements immediately, they will begin to seize your property to satisfy your tax debt. This is know technically as a "tax levy." What can they seize? Anything allowed by law, including your bank account, your house, your vehicles, your business assets, your wages (including commissions and other income), your Social Security benefits, any distributions you take from your 401(k) (though they can't seize your actual 401(k) itself), and even your state tax refund. In practice, they will go after the easiest sources of immediate cash, like your bank account or wages or Social Security payments (known as "garnishment"). Again, their main goal is to get paid, not to ruin your life, and it's a hassle for them to levy physical property. They'd rather levy your financial accounts and garnish your wages than get a court order to seize your primary residence—and they'd much rather have your tax attorney reach out to them to work out a mutually agreeable solution to your situation.
State tax authorities will also place tax liens on your property, or levy it, in order to recover tax debt. In fact, many state tax agencies are even more aggressive than the IRS in seeking payment for back taxes, interest and penalties. Although the IRS gets the most attention, they may not be your biggest problem if you are facing both federal and state tax debt. Whereas the IRS is run by trained professionals (even if it can be slow due to severe understaffing), some state tax agencies are not as well managed or staffed. This can make it even more difficult to get matters settled with a state than with the IRS. Some states will just send tax debts to a private collection agency that will aggressively pursue you, regardless of your financial circumstances or any personal hardships. Unlike the IRS, they just don't care. Some states don't have an Offer in Compromise program, or will permit Offers only in rare cases. And some states may take additional action against residents with tax debt, such as refusing to renew their driver's license or professional license.
If you are being threatened with a tax lien or levy, or want to work out a payment plan with the IRS or state tax agencies (such as setting up an installment plan or getting into CNC status), Gold Path Tax can help. It can be scary to face enormous tax debts you can't pay right away, especially when the government has the right to ruin your credit with a tax lien or seize your money and property. Even though the last thing you probably want to do is pay for a lawyer, having trusted counsel by your side to listen to your full story, prepare and file the correct paperwork, negotiate on your behalf with the government, and advise you of your options (including appeals, litigation, and bankruptcy, if appropriate) is crucial at such a difficult time. We have a lot of experience negotiating with the IRS, and we will try to get you the best possible solution to your tax problems. We even offer expedited (same-day) service to help get your tax lien or tax levy released as soon as possible. Contact us for a free initial consultation with a tax attorney about your situation. We want to hear from you, and to do everything we can to make your situation better. Our Managing Attorney, Goldie Greenstein, has has helped many clients with their tax liens and levies, and she may be able to help you. She can be reached by phone at 248-246-1154 or by e-mail at email@example.com.