One thing that is not certain, is exactly how you’re supposed to deal with taxes….
And the IRS banks on that when they come after you.
If you owe the IRS money, or if it’s been a few years since you filed taxes, you must know your options. The IRS preys on your fear and what you don’t know in order to maximize how much money they can collect from you and put in their pockets.
The #1 fear most people have is, “Can I go to jail?” Which isn’t a simple yes or no question, but I think you’ll be surprised to learn the answer, which I’ll reveal below after we cover the 3 worst mistakes people make when they haven’t filed taxes or owe the IRS money.
So, read on below so you can stop living in fear and looking over your shoulder. Consider this an opportunity for a fresh start where you can move on with your life and be worry free.
Mistake #1
Doing nothing.
Whether it’s fear or analysis paralysis due to the overwhelming amount of (mostly bad) information out there, doing absolutely nothing after the IRS contacts you is about the worst thing you can do.
That’s because even if they don’t hear from you, they will start assessing penalties and interest. Over time that can double or triple how much you owe.
The IRS can also file liens on your property and send levies to actually take your property, empty your bank account, and garnish your wages.
Most people don’t know it, but there are options that may reduce how much you owe and stop the collections process.
Here’s what to do instead:
Review the letter they’ve sent you in detail, and start gathering the documents and information requested in the notice.
Whether you contact them or you have an attorney contact them on your behalf, someone should get in touch with the agent assigned to your case to find a resolution.
IRS tax problems don’t go away on their own and you need to face them head on.
Whether you do it yourself or get someone else to help will depend on your situation.
If you’re worried about criminal charges, a large balance owed, if you’re too busy, or afraid that saying the wrong thing could hurt you during the process, it’s best to hire an attorney.
If you’ve got the free time and don’t mind waiting on hold for hours with the IRS and you don’t think you’re at risk for criminal prosecution or owe a large amount, you can probably handle the situation yourself.
No matter what you do, keep a log of any and all conversations that you’ve had. Never volunteer information, and if you’re unsure, don’t make stuff up. Be honest and then start trying to find the answer.
Mistake #2
Not realizing you have options.
The tax code is so complicated that it’s difficult for anyone to understand. Even IRS employees can’t keep up sometimes due to its everchanging nature.
Not knowing your options is almost as bad as doing nothing at all. Often times people will start the process only to give up midway through. They don’t realize that there are ways to reduce how much they have to pay and options to break it into payments.
It’s best to settle the amount you owe with the IRS to avoid further penalties, interest, and the stress that comes along with dealing with them.
But not everyone can settle what they owe in a lump sum, and even when they can, no one wants to throw away money they can legally keep.
You must know your options.
And I’ll briefly cover the most popular below:
Offer in Compromise – This is where you agree to pay an amount that’s less than what you owe. This isn’t as easy as just throwing out an arbitrary number to the IRS and hoping they accept it. There generally has to be either a doubt as to liability or a doubt as to collectability. Lastly, they can accept a compromise based on effective tax administration.
Installment Agreements – This is where you pay the IRS a fixed amount each month. Some people are shocked to learn just how little they can pay monthly, even when there’s a large amount owed. There’s usually a ten-year statute of limitations on IRS collections. So, you may end up paying less than owed before the IRS no longer has the ability to collect.
Penalty Abatement – If you can’t settle your tax liability, you may be eligible to have the penalties and interest lessened or removed.
If you just can’t pay at all, here are some other options:
Currently Non-Collectible Status – If you can show the IRS that you have no way to pay them, they may agree to stop the collections effort and you won’t have to pay them right now. This doesn’t stop penalties and interest from accruing. They’ll also continue revisit your financial situation over time to see if you’re capable of making payments.
Bankruptcy – Not all taxes owed are eligible for bankruptcy. But if you truly have no way to pay, bankruptcy might be an option. Considering that it affects many other aspects of your life, this is generally a last resort.
Mistake #3
Choosing the wrong help.
If you’ve decided you want or need help with your tax problems, you need to make sure you choose the right professional.
Like the IRS, tax resolution companies prey on what you don’t know to make money. They’ll say things like, “we have former IRS and FBI employees on our team” or “Settle your tax problems in 60 seconds.”
Often times they can’t fix your problems at all and have minimum wage call center representatives handling your problems.
Don’t take my word for it. A quick google search reveals that the FTC, Fox Business, Investopedia, and many other reputable outlets warn against using this ethically questionable semi-legal tax scam.
CPAs are another option. They generally operate at a much higher level of integrity and are licensed and regulated by the state. They have plenty of experience with filing taxes and sophisticated accounting principles. But a CPA is usually who you want to see before you have tax problems. Often times they can seamlessly handle your taxes and prevent the IRS issues from happening in the first place.
The #1 reason not to use an accountant or tax resolution company.
There’s no attorney-client privilege.
Anything you say to an accountant or tax-resolution company can be revealed and used against you, especially if the IRS is trying to push for a criminal investigation.
Even if you didn’t do something illegal. Something as simple as misspeaking could open you up for accusations of fraud.
When you work with an attorney you have attorney-client privilege which provides you more protections and security.
If you’ve already decided you need help, it’s recommended that you find a qualified tax attorney with an LLM (Master of Laws in Taxation). They make their living studying tax law and preparing persuasive arguments against one of the world’s largest collections agency, the IRS.
#1 Question people have when the IRS sends them a letter.
Can I go to jail?
Every situation is different and while I can’t speak for you, specifically, I can tell you that most people who owe the IRS don’t go to jail.
While it can technically be a crime to owe the IRS money, the overwhelming majority of people have no risk of criminal prosecution for simply owing the IRS money.
The reason people go to jail is because they did something else illegal: falsifying returns, lying, cheating on taxes, and other tax-related fraud.
In any event, make sure you’re prepared and know all of the options that are available to you.
You’re going up against a powerful entity that’s trained to come after you and dig until they can’t dig anymore.
