Receiving a letter from the IRS about back taxes is not a cause for panic, even if you owe money. Most people, however, don't take it that way and automatically assume the worst.
Standard IRS Letters
The IRS has 75 standardized notices that it sends out for a variety of purposes. There are six main types of IRS letters, which often have a CP (for "Computer Paragraph") number associated with them. Here are some of the ones they use for collection purposes:
CP 501 Reminder Notice - Balance Due
CP 503 Second request Balance Due
CP 504 Final Notice & IRS Intends To Levy
CP 297 A Notice of Levy and Notice of Right to a Hearing
CP 297 A CP 90/CP 298 Final Notice Before Levy on Social Security Benefits
CP 90/CP 298 Delinquent Return Refund Hold
An Overview Of IRS Correspondence
There are a few quick things to know about IRS correspondence:
The letter will carefully explain what you need to do.
If they request money and you don't agree with their assessment, they tell you how to respond.
If you don't respond, they will contact you again and again until the matter is resolved.
They will even take bread from the mouths of infants and seniors to get their money. (See CP 297 A above)
If you ignore them, you will continue to pile up interest and penalties that will worsen the amount you owe.
The take away here is that you must deal with IRS correspondence in some way, even if it is to tell them you cannot pay. With over an estimated $80 million in unpaid taxes from 8-20 million people, the IRS is very motivated to collect what they feel is due.
Three Ways Of Settling With The IRS
Pay up. Assuming that you owe what they claim, paying the IRS at once is the most cost-effective way to resolve the matter. When you talk to an agent, they will even suggest that you take out a home equity line or borrow from your credit cards to wrap up your obligation to them. Considering that this approach is costly and may not an option for you, depending on your financial situation, there are two other ways to handle back taxes.
Pay later. Apply for a monthly installment plan. By filling out Form 9465 by mail or online at www.IRS.com, you can apply for a monthly installment plan. The IRS usually agrees if you owe less than $50,000 and can pay within six years. Although this appears convenient, you continue to accrue interest.
Pay less. You can also submit an offer in compromise, which means that the IRS will settle with you for an amount less than the full amount you owe. In theory, the IRS will accept this option if you can't pay your full tax liability or if doing so would create financial hardship. They will verify that you cannot pay the amount as a lump or monthly sum. If you try this approach on your own, your financial life becomes an open book to the IRS. There is normally a statute of limitations of 10 years, but the offer extends this time by one year plus the time it took to come to an agreement.
The Best Way To Work With The IRS
In either case, if you have back tax liability that you can't handle simply in a few payments, contacting a tax relief firm might be your best bet. While no reputable firm will promise the miraculous results that questionable companies advertise on TV, you will have a qualified ally in negotiating the best solution for your financial situation.
FinishLine Tax Solutions works with individuals and businesses around the country to help obtain fair tax settlements from the IRS. Request a consultation today to begin the process.