Owing back taxes to the IRS is a very serious matter. However, familiarity with IRS procedures and limitations will help keep the burden from overwhelming you. Naturally, the IRS wants you to pay as much as you can and as quickly as possible. This is primarily because they have a limited time to collect. By law, the IRS has 10 years from the date taxes are assessed against you to collect them. After 10 years is up, the tax becomes uncollectible and any related liens must be released. This is called the Statute of Limitations.
Keep in mind that IRS attempts to collect back taxes cannot be unreasonable. The taxpayer must be allowed to keep enough income and assets to pay ordinary and necessary living expenses and some other bills. So, the IRS can require a taxpayer to disclose all sources of income and prove necessary expenses in order to determine what may be left over to pay back tax liabilities. There are national and local guidelines the IRS must follow to determine what expenses it can allow. However, they do have discretion to consider additional expenses under some circumstances and presenting good proof of the necessity for certain expenses is crucial.
In some cases, however, the IRS can institute a plan to allow a 6 year repayment schedule without having to prove income and expenses. Such a plan can even be set up without the IRS placing a lien on your property. This set of rules, called the Fresh Start Program, can be used in the event the back tax bill is less than $50,000 ($25,000 for businesses) and the taxpayer agrees to an automatic monthly deduction from a bank account or paycheck. The taxpayer must also get and stay current, meaning that all returns must be filed and there should be sufficient wage withholding or quarterly estimated tax payments to cover tax liabilities as they accrue throughout the year. Qualifying for a streamlined installment plan under the Fresh Start Program significantly reduces the time and headaches involved in negotiating an installment plan based on your budget so every attempt should be made to stay under the $50,000 threshold. In some cases, it may make sense to borrow funds from a retirement account or liquidate assets to stay beneath this threshold.
There are other programs and procedures available to keep a re-payment plan with the IRS reasonable. Check out my blogs on these topics in the coming weeks.
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