All right – first and foremost it is never, never wise to use the Internal Revenue Service (IRS) or your own state's department of revenue as a creditor. Ever! So if you're reading this post we're already past that point and we need to move on.
The process that I'm going to describe here has been used time and again to resolve tax problems. You need to make a commitment to get out of trouble though. Generally this describes the process of resolving matters with the IRS. Resolving issues with your state follows the same general pattern with some minor differences not discussed here.
Payroll / Trust Taxes
Generally if you do not have the wherewithal to pay trust taxes, defined as taxes that the IRS is 'trusting you' to with hold from your employees and subsequently pay to the Department of Treasury, an important step you ALWAYS need to follow is to file your payroll (or sales) tax returns, even if you can't pay the money. This establishes a time limit – or starts the clock. Eventually the clock will expire, but if it never expires, you'll never get out of the issue. File the tax return.
At some point, you will receive a notice. Assuming you can pay when you receive the notice, just pay. Assuming you can't pay, you can start the dialogue with the IRS, but I generally would advise waiting until you get assigned an agent – or a live body. Be prompt and courteous with this person as your fate is in their hands.
The agent will ask you to fill out a variety of forms (the 433 series – Form 433-A & Form 433-B) that are basically designed to determine whether or not you have the ability to pay, and assuming you will have the ability to pay how much you can pay. If you don't have the ability to pay, ever, you stand an extremely limited chance of being discharged but this is extremely rare – so don't hold your breath – regardless of what the late night infomercials say.
So you've filled out the forms. The agent is tasked now with two things:
- Ensuring you don't go further in the hole – be prepared to start getting current.
- Help you develop a plan for working off back tax payments – this will be based on your existing assets and ability to generate cash to meet these prior obligations.
During this time you will be required to be current on ALL tax filings and payments, otherwise you'll go in default and will have to start over, or worse….
Sometimes, at the end of the process, the service will remove penalties – but again – assume the worst here.
If you ignore the problem you will get a notice of intent to levy. You may think that you can get creative by switching up your bank accounts but eventually the IRS will find you as they match up on ANYTHING (e.g. 1099, 1098) that's sent to them in order to discover more information about you. If you get an intent to levy the matter is serious and you need to start the dialogue.
Income Taxes (your own taxes)
There is slightly brighter news on income taxes. The IRS will let you enter into a pre approved agreement if you owe less than $25,000. (see http://www.irs.gov/individuals/article/0,,id=149373,00.html). If you owe more than $25,000 and have the means to get the balance below $25,000 – including penalties and interest – just pay it (even if you have to use a credit card). This will allow you to finance the debt at a reasonable interest rate – but the same principles apply – you have to stay current.
If you are above $25,000 the process is very similar to the Payroll / Trust Tax process.
You can hire an attorney or a CPA to help you with these matters. At the end of the day they can take the direct contact away but will end up following the general process described above.