The majority of collections by the IRS are voluntary, paid as part of withholding from paychecks or quarterly payments by businesses and individuals on estimates of taxes owed. However, with an estimated $600 billion in back taxes still uncollected by the IRS, they are also the world’s largest collection agency, actively seeking repayment of existing tax debts by both businesses and individuals. If you are one of those who owes the IRS money, the back tax solutions offered by the IRS may be confusing, which is why having a partner to help you with tax debt resolution is so important.
How The IRS Collects TaxesThe most common and effective way the IRS collects taxes is through voluntary returns. Each year, every individuals who earns more than a certain amount is required by federal law to complete a return and file it with the IRS. These returns report income earned and estimate total tax due. If more is due than was withheld over the course of the tax year, then that individual will be required to pay the difference.
Even still, this is all voluntary, and with hundreds of millions of such returns filed each year, it can take years before the IRS realizes a return was not filed or income was not declared. Despite the fact that the IRS has more than 89,000 employees and an annual operating budget o $11.2 billion, the volume of returns processed each year is simply too high to take action immediately. On average only 1% of individuals are ever audited – so many people assume they can get away with a mistake here or there.
How Back Taxes Are CalculatedDespite this backlog and the slow response time, it is dangerous to put off paying a known debt to the IRS. Most businesses are required by law to report payments they make to employees, contractors, and vendors, and because businesses are 60% more likely to be audited than individuals, these payments are frequently reported accurately.
So if you received income that was reported on a 1099 by a credit card company, the IRS will know about it, and if you fail to report it on your tax return, they will eventually catch the discrepancy and contact you. Does it happen overnight? Not necessarily, but it will be caught eventually.
How the IRS Deals with Back TaxesUnlike most debt collectors, the IRS is relatively lenient with those who understand the laws and are cooperative. While the repercussions of ignoring a statement or failing to pay on an installment plan can be substantial, the actual flexibility of these plans is a good fit for many individuals if they seek IRS debt relief through the proper channels. Those channels include:
Properly responding to all correspondences
Creating and following the guidelines of installment agreements
Properly submitting an offer in compromise and following through on the agreement
Because the IRS offers a number of back tax solutions for those who are savvy enough to take advantage of them in a timely manner, you can take action early and avoid the most serious responses, such as wage garnishment.