Know the different tax issues:
Unfiled Tax Returns:
Unfiled tax returns can lead to harsh collection action from the IRS. If you have unfiled tax returns it is very likely that the IRS will catch up with you sooner or later. The IRS receives most of your tax information from third parties and will, before the statute of limitations expires, contact you. They may even complete a tax return for you. That return is called a Substitute for Return. Typically these returns do not take into account deductions against your income that you may be entitled to. Therefore, it is necessary to file a complete and accurate tax return as soon as possible.
If you have unpaid back taxes and the IRS has or has not yet taken action against you, find out what you can likely expect next and what actions you should take now to prevent future issues from arising. Unpaid taxes can lead to tax liens, garnishments or even increasing elevated enforcement actions.
The IRS issues numerous notices to taxpayers who owe or may owe back taxes. They are varied in their subject matter and include varied levels of enforcement. Typical letters simply request additional information, while others are seeking payments for back taxes. Those latter notices are routinely sent to taxpayers at different intervals with increasingly levels of potential enforcement action leading to Federal Tax Liens or garnishments.
A Tax Lien gives the IRS a legal claim to your property as security or payment for your tax debt. It is used in order to protect the government's interest in your assets. It is a public notice to creditors. It notifies them that there is a federal tax lien that attaches to all your current and future property and rights to property.
A Levy may be placed against your wages, your other sources of income (social security checks), checking account, savings, 401K, and many other assets that they can liquidate. IRS wage garnishments are the most common form of tax levy. An IRS bank levy can be one of the harshest collection mechanisms used by the IRS. The IRS can legally go into your bank account and take money in order to satisfy unpaid taxes. A Notice of Intent to Levy and Notice of Your Right to a Hearing will be mailed generally, before property is seized. If you don’t pay your overdue taxes, make other arrangements to satisfy the tax debt, or request a hearing within 30 days of the date of this notice, your property may be seized. " The IRS can’t seize your property if you have a current or pending Installment Agreement, Offer in Compromise, or if they agree that you’re unable to pay due to an economic hardship.
An audit is the process in which the IRS reviews your tax return in order to determine if you have properly reported your income and expenses.
Penalties and Interest:
The IRS uses penalties as a way to penalize taxpayers and to scare taxpayers into staying in compliance with tax law. There are actually about 140+ different ones, some of which may be abated upon request. Interest is additionally charged to taxpayers on unpaid taxes.
Statute of Limitations:
The IRS can attempt to collect your taxes up to 10 years from the date they were assessed. However, there are exceptions to this time frame. For example, by law, the IRS will suspend and extend collections while they are considering your request for an Installment Agreement or an Offer in Compromise. If your request is rejected, they will again suspend collection actions for another 30 days, and during any period the Appeals Office is considering your appeal request.
Dissipation of Assets:
Dissipation of assets are assets sold, transferred, gifted or spent on items that are not necessarily living expenses after a tax liability exists. The IRS may add dissipated assets to your offer amount unless you can show that the assets where used for necessary living expenses.
Reasonable Collection Potential:
When considering an offer in compromise the IRS will consider the taxpayers reasonable collection potential which is basically a multiple of your income, plus your assets, minus your liabilities and allowable expenses.
Substitute for Return:
If you do not file a tax return, the IRS will file one on your behalf. The problem with these returns is that the IRS prepares them from the information that they have received from third party information returns without including deductions that you may be entitled to.