18
Aug

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Unfortunately, not all of us will receive a tax refund – some Americans, of course, will find upon completing their tax returns that they actually owe money to the IRS. There are a number of reasons for such tax obligations: employers may fail to withhold enough tax from each paycheck; employees may have claimed too many dependents or allowances; or self-employed individuals may have underreported their incomes. Others may have accrued significant back taxes over the years.

No matter the reason, it’s extremely important to work with the IRS to pay off such debts. There are consequences for not paying taxes – once owed amounts exceed a certain amount (which can change from year to year), the IRS can impose a tax lien in court, which gives the federal government a claim to actual assets. Does this mean they will evict the taxpayer onto the street, or repossess a vehicle? No, but if the consumer ever wants to sell a house or other property, a lien may make the process far more difficult. A more serious penalty is a levy, which does give the government the right to simply seize property. The less-invasive lien process is usually imposed first, well before any levying occurs.

What’s more, because liens are reported to the major credit bureaus, their presence negatively impacts credit scores and make it more difficult to obtain new credit. Such liens will remain within credit reports for a maximum of seven years. Recent legislation (2013) requires credit bureaus to remove paid tax liens upon request, but, unfortunately, this is not an automatic process and does require that the consumer take proactive action to demonstrate payment and make the formal request.

Fortunately, consumers who owe the government taxes have a few options at their disposal.

In a perfect world, the best-case scenario for handling the issue of owed taxes is to simply pay the IRS immediately so that no negative consequences occur. In this case, the taxpayer can pay online or, of course, send in the traditional hand-signed check or money order.

Of course, not everyone has the resources to pay the IRS immediately upon owing on their taxes. Luckily, the government has two options in place for people in this situation.

One option is to set up a payment plan to pay off the debt in installments. In this case, a small fee (usually between $43 and $120, depending on the financial circumstances) is charged to set up the agreement. Unless the government is owed more than $50,000, the taxpayer can apply online through the IRS website here. Individuals can also apply over the phone or through the mail. The plan will provide a monthly payment plan and reduce or nullify most interest and penalties that would have accrued had the tax not been paid.

Another option is to negotiate a compromise with the IRS, in which the consumer settles the tax debt for less than the full amount owed. When paying the full tax debt would create financial hardship, such individuals may be able to choose this option. The IRS will evaluate each individual’s circumstance, taking into account ability to pay, income, expenses, and assets. If they approve this option, they will often accept an amount that is equal to the whatever money is left over each month after all living expenses are paid. This should be a last resort for those who have exhausted or don’t qualify for other options.

No matter what route is taken, it’s essential to every consumer’s credit and financial health that outstanding tax debts are not ignored. In that regard, it’s far better to work with the IRS and come up with alternative payments than simply do nothing, accrue further debt, and possibly have a lien or levy imposed. In most cases, the IRS is willing to work toward helping taxpayers settle their obligations. In any case, delaying such payments will almost always lead to much more serious consequences later.


Posted in Credit Score