When people cannot pay the back taxes for whatever reason, they tend to bury their heads in the sand or panic not to respond to payment demand letters from the IRS. Your best bet, however, is to contact them as promptly as possible and/or cooperate with them to the fullest extent since the Internal Revenue Service has the discretion to extend the payment period up to 120 days. But, they always have the right to file the __Notice of Federal Tax Lien__ with a proper local authority to claim their interests in your properties once your tax payments become delinquent.
!!! What is a Federal Tax Lien and What is a Levy?
Due to unforeseen financial circumstances, you can either fail to pay your tax fully on time or can be assessed after the tax audit. In either case, you are supposed to pay in full within 10 business days unless you qualify for up to 120 days of additional time to pay. If you cannot make payments to settle your delinquent taxes after the notice and demand letter, the Internal Revenue Service (IRS) of the United States Treasury has the right to rectify the situation by filing a federal tax lien. This __lien__ is the legal claim against non-compliant taxpayer’s current and future properties. On the other hand, a __levy__ directly freezes the assets of a tax debtor to secure more immediate payment.
!!! How to Remove a Federal Tax Lien
If you pay off the delinquent federal debt in full, the Internal Revenue Service (IRS) will remove the lien within 30 days of full payment, which includes penalty and interest. When you cannot pay in full, however, you had better pay as much as you can at the moment and explore other payment options with either tax attorney or a qualified accountant. Other payment arrangements include the monthly payment plan and an Offer in Compromise.
!! Payment Plan (Monthly Installment Agreements)
__ Form 9465 (Installment Agreement Request)__ allows monthly installments to be made if you find paying the amount owing all at once is too burdensome but installments must be on time. Otherwise, you will be in default on the taxes. In that case, you might have to pay a reinstatement charge. If you satisfy all the prerequisites of the IRS payment plan, you may even be able to use an online payment arrangement, depending upon the delinquent tax amount.
!! Offer in Compromise
Like the monthly payment plan with the IRS, you must be current with the IRS by filing all the required taxes before you apply for an offer in compromise. An __Offer in Compromise__ allows you to settle your tax debt for less than the full amount you owe by filing Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) or Form 433-B ( Collection Information Statement for Businesses) with the proof of your financial status.
The Internal Revenue Service will consider your unique personal and financial situations and facts such as the current assets, ability to pay, current and prospective income, current age, living expenses, family problems, etc. An __Offer in Compromise Pre-Qualifier__ in the IRS web site can give you a preliminary proposal amount. If the accepted amount is paid, the taxpayer should initiate to request the release of the lien. The IRS often do not follow through with the removal of the lien voluntarily.
!!! The Statute of Limitations and Federal Tax Liens
For taxes assessed after November 5, 1990, the IRS has ten years from the date of a tax assessment to collect tax debt from the taxpayer. When this date passes, the IRS is barred from attempting to collect your debt unless you waive the enforcement of the statute by a written consent. You should initiate to obtain a Certificate of Release of Federal Tax Lien to expunge the record of the lien from the local and/or state office of records since the IRS is well known to be tardy in removing the lien.
There are, however, many exceptions that extend the collection time period such as a signing of a waiver, bankruptcy proceedings, Offer in Compromise, and the filing of a Collection Due Process. Innocent Spouse Relief and any other forms of relief extend the statute of limitations. It is imperative for you to consult with either a tax attorney or a qualified CPA when you are asked to sign a form after your offer has been accepted.
!!! Lesson Summary
When people cannot pay the back taxes, they tend to ignore payment demand letters from the IRS. Your best policy, however, is to contact them as promptly as possible and cooperate with them to the full extent since the Internal Revenue Service has the right to file the __Notice of Federal Tax Lien__ with a proper authority to claim their interests with your current and/or future properties once your tax payments become delinquent. If you cannot make one lump sum payment, you can opt for either an installment plan or offer in compromise. The statute of limitations on the collection of the federal tax lien is usually ten years from the date of assessment.