The IRS Collections Process: What happens when you can’t pay? | Winchester, VA
Updated: Jun 19, 2021
If you don’t pay your tax in full when you file your tax return, you’ll receive a bill for the amount you owe. This bill starts the collection process, which continues until your account is satisfied or until the IRS may no longer legally collect the tax; for example, when the time or period for collection expires (in most cases this is 10 years from the date of assessment).
The first notice you receive will be a letter that explains the balance due and demands payment in full. It will include the amount of the tax, plus any penalties and interest accrued on your unpaid balance from the date the tax was due.
The unpaid balance is subject to interest that compounds daily and a monthly late payment penalty. It is in your best interest to pay your tax liability in full as soon as you can to minimize the penalty and interest charges.
If you’re not able to pay your balance in full immediately, the IRS may be able to offer you a monthly Installment Agreement. You can complete this on-line. Go to irs.gov and click “payments.” There’s a user fee to set up a monthly installment agreement. For low-income taxpayers, the user fee is reduced and possibly waived or reimbursed if certain conditions apply.
Direct debit installment agreements offer a lower user fee than other installment agreements and help you to avoid defaulting on your agreement by allowing timely payments automatically.
Interest and late payment penalties will continue to accrue while you make installment payments.
If you can’t full-pay under an installment agreement, you may propose a partial payment installment agreement (PPIA) or apply for an offer-in-compromise (OIC). A PPIA is an agreement between you and the IRS providing for less than the full payment of the tax liability by the expiration of the collection period. An OIC is an agreement between a taxpayer and the IRS that resolves a taxpayer’s tax liability by payment of an agreed upon reduced amount. Before an offer can be considered, you must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. Taxpayers in an open bankruptcy proceeding aren’t eligible.
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