Here's what you need to do, in this order:
- Admit You Have a Problem and Decide to Do Something About It
Go to your mailbox and open the latest letter. Now go find the other letters (if you haven't shredded them already). Make a stack by date--latest letter on top. Understand that non-response is not going to make your tax debt go away, but will instead lead to unpleasant things like bank account levies and wage garnishment. You can prevent that from happening, however, by taking action.
- Find Out Where Things Stand Now
Whether you work with a tax debt professional or do it yourself, you need to find out how much you owe and why. Like Nike says, "Just do it." If you deal with the IRS personally, either by going to your local branch office or by phone, note the name and "badge number" of the IRS employee with whom you speak. That way, if someone tells you something incorrect your rights are legally protected.
- File Back Tax Returns
Many people who owe taxes have simply written off the idea of filing tax returns. This is a huge mistake, because the IRS does it for you anyway--to the government's advantage. Self-employed people, especially, often end up owing more than they truly would if they did their taxes and took the deductions they're eligible for by law. If you haven't filed all tax returns for the last five years, do so now.
- Pay As Much as You Can ASAP
Now it's time talk dollar figures. The more you pay upfront, the less interest and penalties accrue, so bite off as big of a chunk as possible. IRS interest rates change quarterly, but the typical rate on tax debt works out to be about 14 percent per year. So if you can borrow at a lower interest rate than 14 percent per year and pay off the whole debt right now, you are well-advised to do so. A home equity line of credit can be good in this situation because the interest can be tax-deductible.
- Make Arrangements For the Rest
Most commonly, any remaining tax debt will have to be paid according to an IRS Installment Agreement. Use IRS Form 9465 to propose a plan. Interest will be charged daily until the whole debt is paid. In some rare cases--you've become disabled, for instance--you may qualify for a hardship delay. They'll make you prove it, though, and you'll have to turn over detailed statements of your assets.
Of all the things you can do to get your tax debt under control, number one is by far the most important and most difficult. That's why, for many people who owe tax debt, the first step is a last resort. But rest assured--it's a step in the right direction.
About the Author:
Andrew Freiburghouse is a freelance writer and editor living in Brooklyn, NY. He has worked in a variety of fields including magazine journalism, tax preparation, screenwriting, copywriting, and real estate. He graduated from Santa Clara University in 1999 with a B.A. in English. A regular contributor at tech blog Edgelings.com, Andrew was born and raised in the City of Los Angeles. He hopes he will survive the New York winter.