Receiving a letter from the IRS about a tax issue can be stressful. It could be a minor issue such as missing or incorrect information on your recent tax filing or something as serious as tax fraud. Whatever the case, it’s important to go through the letter to understand what the problem is and how to handle it. If you have tax debt, here’s what you should do.
1. Do not ignore the IRS
The first thing to do when you receive a letter from the IRS is to make a plan to respond as soon as possible. While you may think it’s easier to ignore the letter and pretend that you never received it, you might make your situation worse. Consequences of ignoring IRS letters include:
- Incurring penalties and monthly interest on your tax debt
- Facing aggressive tax collection tactics from the IRS
- Losing your right to dispute collection
- Denial of passport application/renewal
- Asset seizure
According to the Taxpayer Bill of Rights, every citizen has the legal right to dispute any claims made by the IRS. Citizens also have a right to clear explanations of all IRS procedures, decisions and outcomes regarding their tax accounts.
2. Understand your options
Tax debt cases vary depending on each individual situation. As such, it’s important to understand your case and your options in order to employ the best tax relief strategy. Failure to do so may cost you valuable resources in terms of time and money.
Examples of tax relief programs include:
- Tax debt settlements
- Innocent spouse relief
- Penalty abatement
Without a proper understanding of your options, you may end up missing out on a good deal. For example, if you choose to settle with the IRS for your ex-spouse’s tax debts, you’ll end up losing money when you could have instead filed for innocent spouse relief.
3. Identify the cause of the problem
To avoid debt accumulation, you have to get to the root of the problem. Find out what caused your slip up and work out an arrangement with the IRS to pay off your debt. You also need to stay up-to-date with your current tax responsibilities to avoid penalties.
Common causes of huge tax liabilities include:
- Misunderstanding tax laws
- Failure to file returns
- Failure to pay estimated tax
- Failure to claim deductions
- Failure to write off business expenses
Reviewing your tax withholding and deductions can help you manage your tax liability and prevent recurring tax issues with the IRS.