You complete your tax forms, look at the bottom line, and your heart and head start pounding as panic sets in. You need more money to pay the balance due.
Paying taxes is bad enough if you can grab a second job or work a few hours of overtime to earn the difference, but what if you’re disabled and owe back taxes?
Can the IRS take your disability benefits? Are there payment options? We will answer these questions and more so you know what to do if you owe taxes while disabled.
Will I Lose My SSDI Benefits?
As long as you meet the Social Security disability requirements or income requirements, you can collect your SSDI and SSI when you owe taxes.
The IRS can garnish your Social Security checks for payment, reducing your monthly payments. The good news is that if you owe back taxes to the state, they can’t garnish your SSDI benefits.
If you have not received approval for SSDI and you still owe back taxes, you might not qualify for disability. This can happen if unpaid Social Security tax is included in your back taxes. You need to have enough qualifying years paid into the program to collect.
How Does Garnishment Work?
A garnishment is when the IRS holds part of your social security check wages to pay the back taxes. This is after the IRS sends you notices or letters regarding your back taxes without resolution.
When you receive correspondence from the IRS, take the steps required before the deadline. If you disagree with the IRS notice, you can dispute it. Contact a tax professional knowledgeable about handling IRS disputes to help you reach a resolution and avoid garnishment.
The IRS can garnish any SSDI back pay benefits they owe you, plus your regular monthly payments. SSI benefits, which are for medical conditions, are not garnished.
The IRS uses garnishment as a final step. You will receive a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing. If you don’t schedule a hearing, the IRS will begin garnishment within 30 days.
In addition to garnishment, the IRS can take your property, the money in your bank accounts, vehicles, real estate, and personal property to pay your taxes.
If you get caught in a garnishment for back taxes, the IRS can take up to 15% of your SSDI payments under the Federal Payment Levy Program (FPLP). There are exclusions from this levy for SSDI recipients with an income at or below the poverty level guidelines of the Department of Health and Human Services.
This can have a tremendous impact on your monthly income. If you collect an SSDI benefit of $2,500 per month, a 15% garnishment of $375.00 may be subtracted from your monthly payment, leaving you with $2,125 until taxes are paid in full. Depending on where you live, this may be your per-person grocery allowance.
When You Can’t Pay Your Taxes
In 2023, 29% of people owing taxes didn’t have the funding to pay by tax day. Rather than risk the seizure of assets and jail time, file on time and pay as much of your balance due as you can.
It’s tempting to skip filing during tax season to avoid the expense. You’re just one person out of millions. Will they notice your return isn’t among the over 262 billion returns they process?
Not filing taxes when you can’t afford to pay compounds the problem; there is a penalty for failure to file. The IRS will issue notices for a past-due tax return. If you don’t respond, they will calculate your taxes, penalties, and interest based on the information they have on hand and send you a bill.
Taxes not paid by the filing date incur interest and late payment penalties. When you’re filing Form 1040 and cannot pay your balance, you may:
Request a Payment Plan using the online payment application (OPA). Upon completing the application, you receive immediate notice on whether or not you are approved. This option is available to individual taxpayers and businesses and has a lower user fee than other application methods.
File Form 9465 with your return. This is an alternative to the OPA, takes 30 days or longer to process, and incurs user fees.
Call to Request a Payment Plan by calling the number on your bill or, if you don’t have a bill, dial 800-829-1040 for individual returns or 800-829-4933 for business returns.
You can request the above whether you already have a payment plan or are applying for the first time. There is a user fee for installment payment plans. The fee may be reduced or waived depending on income.
Eligibility for payment plans requires all filing and payments to be current.
Types of IRS Resolutions
When IRS notices make you feel like you’re going down a sinkhole, don’t despair. Polston Tax specializes in helping people who owe back taxes reach a resolution with the IRS.
Currently Not Collectible Status (CNC)
This is for people whose financial situation prevents them from paying taxes they owe the IRS. Before granting this status, the IRS will review your income and expenses and decide if you can obtain a loan or sell assets to pay your bill.
If the IRS agrees you can’t afford to pay your taxes and basic living expenses, they may qualify you as not collectible. The IRS will not take collection steps against you when you are CNC.
This is a temporary fix, and the IRS will assess interest and penalties against the balance you owe. They may also keep refunds due you to pay against the outstanding debt.
Long-Term Payment Agreement
This payment option is for those owing under $50,000 in taxes, interest, and penalties. It allows the taxpayer up to 72 months to pay the balance. You must make monthly payments on time to avoid cancellation of the agreement.
Innocent Spouse Relief
When your spouse understates taxes due on your joint tax return, and you are unaware of the errors, you may qualify for innocent spouse relief. This only applies to taxes applicable to your spouse’s income. Not eligible for relief are:
- Business taxes
- Household employment taxes
- Individual shared responsibility payments
- Trust fund recovery penalties on employment taxes
- Your income
Some errors resulting in understated taxes include unreported income, incorrect credits and deductions, and incorrect asset values. Joint return tax liability is not eliminated by:
- A divorce decree stating your spouse holds tax liability
- Your spouse is the only wage earner
If you never agreed to file a joint return with your spouse, the joint return is invalid. This does not qualify you for innocent spouse relief. It limits your liability for your spouse’s taxes, so follow the instructions on the notice you receive and contact a tax professional for assistance.
Offer in Compromise (OIC)
The IRS allows you to settle your tax debt for less than you owe with an offer in compromise. This option is ideal for those unable to pay their entire tax obligation without enduring financial hardship.
The IRS considers the ability to pay, asset equity, expenses, and income. They usually accept an offer in compromise when similar to what they anticipate being able to collect.
Eligibility requirements include:
- Filing of all tax returns
- Payment of all payment estimates
- No bankruptcy proceedings
- Valid extension for the current year
- An employer making tax deposits for the present and past two quarters
If you apply and aren’t eligible, the IRS will return your application and application fee. They apply any offer payment you send to your outstanding balance.
Partial Pay Installment Agreement (PPIA)
PPIA is a monthly installment plan for taxpayers who can’t pay their total balance within the time the IRS has to collect. The Collection Statute Expiration Date (CSED) is usually ten years from the assessment date.
With a PPIA, you make monthly payments until the CSED expiration. Upon expiration, the IRS will cease all collection procedures, including levies and seizures.
Short-Term Payment Plan
A short-term payment plan is for those owing under $100,000 in tax, interest, and penalties. It has no fees but accrues interest and penalties until paid. You may qualify for an extended payment agreement if you cannot pay within 180 days.
Streamlined Installment Agreement (SLIA)
The IRS does not require financial information for an SLIA. To qualify, the total tax, penalties, and interest must be $25,00 for people in business with income tax only or an out-of-business taxpayer.
Those owing $25,000 to $50,000 may qualify as an out-of-business sole proprietor or individual who agrees to pay by payroll deduction or direct debit.
All taxes, interest, and penalties must be paid within 72 months or by the collection statute expiration date (CSED), whichever is less.
If You’re Audited
It’s normal to stress out when you receive an audit notice. Take a deep breath and relax; being audited isn’t an accusation of wrongdoing.
Once you file a return, the IRS has three years to begin and finish an audit. During the review, they may request documents or additional information to confirm what you claim on your tax return.
The majority of IRS audits take place by mail. Review all records and prepare for the interview if yours is an in-person audit.
Provide everything the IRS requests during the audit process. After completing the audit, the IRS notifies you if there are no changes to your return or their proposed adjustments. You have 30 days to appeal the decision with the IRS Office of Appeals.
After 30 days, the IRS sends a Statutory Notice of Deficiency, closing the audit. You can then petition the U.S. Tax Court with your objections. Tax Court assesses decisions made by agents to determine whether they are correct.
Many people overlook their 30-day notice for mail-in audits because the letter proposing adjustments is the 30-day letter. If you don’t appeal within 30 days, you lose your opportunity to object.
Don’t Ignore That Letter
Your first tip that the IRS has concerns taxes comes as a letter. You may want to throw it in a drawer and forget it exists, but that is the worst thing you can do.
The correspondence will explain their reason for contacting you. It gives instructions on how to proceed. Reasons the IRS may contact you include:
- The refund due is larger or smaller than the amount on your return
- There is a balance due
- They have a question
- Identity verification
- Additional information required
- IRS changed your return
- Delays in processing your return
If you agree with the notice, comply with any instructions and make payments due by the deadline. If you disagree, file your objection before the deadline using the steps provided.
Keep a copy of all notices or letters you receive with your tax records, and contact a tax resolution professional for assistance. Notices you may receive include the following.
CP2000 Underreported Income
The IRS automated underreporter (AUR) compares information it receives from third parties, such as employers and financial institutions, with your return. If it finds a discrepancy, a tax examiner closely examines your return and compares it with all information received from third parties, including W-2s, 1099s, and 1098s.
If the examiner determines a discrepancy, a Notice CP2000 will arrive. This is not a bill. It is a proposal to adjust your credits, deductions, income, or payments to comply with all documents received. This may result in a higher refund or you owing additional taxes.
CP75 or CP75A Request for Supporting Documentation
The IRS is auditing your return and needs verification for items claimed on your return. You must respond by the date on the notice.
Check the top right corner of the notice to see which tax year they are auditing. Make sure you send documentation for the correct tax year. Always send copies to the IRS and retain your originals.
Get Help if You’re Disabled and Owe Back Taxes
It doesn’t matter whether it’s an information request, an audit, or you owe taxes you can’t pay; dealing with the IRS is stressful. When you’re disabled and owe back taxes, the fear of what will happen is overwhelming. Let experienced tax professionals alleviate that stress.
Polston Tax Resolution & Accounting deals strictly with issues concerning taxation. Check the services our team of tax attorneys, IRS enrolled agents, and other taxation professionals handle, then contact us today for an appointment.
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