What Happens If You Owe The IRS More Than $25000?

Have you recently filed your federal taxes and realized you owe the Internal Revenue Service (IRS) more than $25,000?

Or, have you received that dreaded mail from the IRS informing you that you owe over $25,000 in back taxes?

As a taxpayer, this is never the scenario that you ever wanted yourself in, as everyone knows you don’t want the IRS coming after you. Yes, even the Joker, the clowny bad guy in the DC Universe, is crazy enough to take on Batman, the billionaire superhero, but gets serious when he has to pay his taxes.

Enough of comics; the reality is that it is normal to be frustrated, angry, or even have the feeling that the walls are closing in on you when you are in such a situation.

However, before you panic and start becoming desperate about where you’ll get the money to pay off these taxes, it is important to know that a lot of people owe the IRS in back taxes.

While this doesn’t mean that you are off the hook, it’s an assurance that with the right approach and use of available IRS programs, you can meet your obligations without much fuss.

What to Do When You First Realize You Owe the IRS More Than $25,000

The first step you need to take when you receive mail from the IRS is to ascertain that you actually owe the taxes due. Essentially, this means carefully going through your federal income tax returns, focusing on the year in question.

Remember, the IRS sends different types of notices to taxpayers with back taxes, and depending on the notice you receive, a reason for why you owe taxes may be provided.

If a reason is not provided, extra attention should be paid to your tax returns as it could be possible you made a mistake or two leading to the additional tax. In case you made mistakes, you should file an amended return if it’s within three (3) years after you filed your returns.

If you still can’t figure out how the IRS got to the figure sent, you should contact them and ask them how the back taxes were determined.

Note: The IRS always computes tax liability to include interest and penalties, which might explain why you owe more than $25,000.

Once you are sure about the amount you owe the IRS, it is time to strategize on how best to meet your tax obligations, factoring in the IRS collection process.

The IRS Collection Process and Types of Notices Issued

In general, the IRS has up to ten years from the assessment date to collect taxes due. Your assessment date can be accessed from your IRS account transcript, and it mostly falls on April 15th unless it’s a holiday, weekend, or prolonged by the IRS.

Nevertheless, each case handled by the IRS is unique, which is why the taxman will send you notices to guide you on what needs to be done.

Here is an overview of the IRS collection process and the types of notices that will be issued:

• Issuance of the initial notice. The first step the IRS takes when you owe back taxes is issuing you with an initial notice demanding payment of the amount due. Your notice will contain critical information, including your total tax debt, the due date, and how you should pay.
• Reminder with a second notice that includes penalties. If you fail to make payment as stipulated on the initial notice, the IRs will send you a second notice. This notice will remind you of your tax debt, failure to adhere to the initial due date, and a new time frame to make the payments. It will also include penalties and interest charges on the initial amount.
• Last reminder with a final notice. If you don’t make payments after receiving the second notice, the IRS will send you a final notice. This notice will clearly state your failure to adhere to the initial notices and may also include extra penalties and charges on the initial tax debt owed. Most importantly, it may also contain a warning of asset seizure and threat of wage garnishment.
• IRS initiates action with a levy. Once the IRS realizes you are not taking action even after the final notice, they will initiate action with a levy. Doing this provides them with the authority to seize your assets, and this may include your property, wages, and bank accounts.
• Further action with a tax lien. If a levy is not enough to propel you into paying off your tax debt, the IRS will take further action by placing a tax lien on your property and assets. With a tax lien, you’ll not be able to sell or refinance your assets and the IRS will also have authority to seize your assets. A tax lien will also show up on your credit report and damage your credit score.

Payments Options Available if You Owe the IRS More Than $25,000

Owing the IRS more than $25,000 calls for immediate action as this is the only way to avoid the severe consequences that might result from such a tax debt. Luckily, there are several payment options to explore, and these are:

1. Making a full payment

If you are in a position to pay your tax debt at once, the IRS allows you to make a full payment. The advantage of this payment method is that it will instantly free you from this burden and you can move on with your life without worrying about any consequences.

Its main advantage is that you need to raise or have a huge lump sum that can pay your tax debt of over $25,000. Considering that the interest that the IRS charges is lower than what credit card companies charge, it is not advisable to pay off this debt using your credit card.

A suitable way out would be if you have an asset that you can quickly sell and raise the amount. You can also decide to make a full payment if you are soon receiving a huge bonus or inheritance that can cover the tax debt.

If you need a little time to raise funds before making a full payment and the IRS is soon taking collection enforcement action such as a levy or tax lien, you can request a collection hold or stay on collection. This will help temporarily halt action against you while you raise the funds to pay the tax debt due.

2. Streamlined installment agreement

If you aren’t in a position to make a full payment, you can opt for the streamlined installment agreement. This is a program by the IRS that allows you to pay your tax debt by making direct monthly payments from your bank account through a debit card or payroll deduction.

You’ll need to qualify for this program as the IRS only considers taxpayers who are in filing compliance and can pay the entire amount plus penalties and other interest charges within 72 months.

Bear in mind that you’ll need to apply for the streamlined installment agreement, and a set-up fee that varies depending on how the payments will be made applies. Most importantly, once accepted, if you miss more than 1 monthly payment, the IRS will consider you a defaulter and terminate the agreement. To reinstate the agreement, you’ll need to pay another fee to the IRS, which is usually $89.

An advantage of entering into a direct debit installment agreement is that you can ask the IRS to withdraw the tax lien filed against your property. However, to qualify, you’ll need to have made at least three consecutive payments, have an outstanding tax debt that is below $25,000, and can clear off the balance within 60 months.

3. Fresh Start Initiative or Offer in Compromise (OIC) programs

If you owe the IRS more than $25,000 and realize it will be a struggle to pay off the debt in full, it’s time to consider the Fresh Start Initiative program. This program is designed to help taxpayers going through a challenging financial period and can only meet their obligations if their tax debt is reduced or they have a more flexible payment plan.

To qualify for the Fresh Start Initiative, you should:

• Not owe the IRS more than $50,000
• Meet filing compliance for the last three years
• Not have been involved in tax fraud or evasion
• Agree to pay taxes owed within 6 years

You can also consider the offer in the Compromise (OIC) program, which allows you to get into an agreement with the IRS to pay back taxes for less than the amount owed. This should be a last resort and best works if;

You can’t pay the taxes owed, or by doing so, you’ll face financial hardships such as possible bankruptcy

• You are retired and on a fixed income
• You meet the qualifications to be a low-income individual/family
• You are having legal troubles with the IRS, which can be resolved by paying off your tax debt

Both the fresh start initiative and offer in compromise programs can be quite lengthy processes and offer no guarantee that an application/offer will be accepted.

4. Currently not collectible

Finally, there is the currently not collectible status, which is not an actual payment option but a status given to taxpayers who can’t meet their tax obligations.

This status is given to taxpayers whose income is way less than allowable expenses based on national guidelines. It stops the IRS from taking action against you for a limited period, often 24 months.

Final Thoughts

For many taxpayers, nothing is as scary and frustrating as owing the IRS back taxes, especially if the amount is more than $25,000.  Fortunately, as discussed in this blog post, this never means you don’t have legal and practical options that will get you back to good standing with the taxman. 

To ease this journey, it is best to consult an Atlanta tax attorney to evaluate your situation and offer guidance on the best options to explore. Here is where we, Cumberland Law Group, come to your rescue. For tax debts and other troubles with the IRS, contact us today for your free consultation.