The IRS and Collection of Tax: What to do When the IRS Says You Owe Money!

Jane A. Bruno, JD

2007

Almost everyone loves to get mail—except when the letter is from the IRS. On rare occasions, a letter from the IRS will inform you that you miscalculated your tax and it actually owes you money! But generally, the IRS will send you a letter advising you that it needs more information, you owe more tax that you thought, or, worst of all, the tax due has not been paid and the IRS is taking steps to collect it. These notices are especially troubling if you live overseas and it is difficult to contact the IRS. However (and it’s hard to overemphasize this), DO NOT IGNORE NOTICES FROM THE IRS! These notices are very serious and need your immediate attention. The IRS has the power to levy on your property, take all or part of your wages, damage your credit rating and take other steps to collect tax it believes you owe.

The good news is that there are procedures available to protect your rights and work through the process to hopefully reach a resolution that you can afford and that will satisfy the IRS.

First, recognize that you have rights as a taxpayer, including the right to be treated fairly, promptly, professionally and courteously by IRS employees. It has been my experience that most IRS employees working in collections are knowledgeable and willing to work with you for a mutually agreeable solution. It is well worth the effort to call the contact person or office that is printed at the top of each IRS notice and try to establish a working relationship with someone in that office. If you are not in a position to make phone calls, it is worth hiring a tax professional in the US that is experienced in this area to make the contact for you.

Second, you have the right to disagree with your tax bill. It is important to carefully look at which tax year is in question, what type of tax is being assessed and on what sort of income. If you feel it is wrong, you can ask to meet with an IRS manager and/or appeal the collection action, provided you do so in good faith with documentation to back up your position. For Americans overseas, this situation would typically arise if work was performed for a US company that did not withhold tax, but supplied a W-2 showing wages earned to the IRS and the employee. If the employee did not file a tax return claiming the foreign income exclusion, the IRS has the right to prepare a tax return on behalf of the employee based on the wages reported and then assess tax on that full amount. If you get a notice to that effect, with a huge tax bill, you may be able to resolve the whole matter by contacting the IRS manager and filing a tax return with the foreign income exclusion elected.

Third, there are payments options available if it is determined that the tax is, indeed, owed and you do not have the funds to pay it immediately. Of course, the IRS will take the position that you need to liquidate everything you can to pay the tax. And it will look carefully at your financial picture via a detailed form you will have to fill out. But you may just qualify for an Offer in Compromise which is an agreement between the taxpayer and the IRS that settles a tax liability for less than the full amount owed. (The situations where this can be used and the process are described in IRS Form 656, Offer in Compromise found at www.irs.gov).

The other possibility is an Installment Agreement which allows you to make full payment of your debt, but in smaller, more manageable amounts. (For this option, you will need IRS Form 9465, Installment Agreement Request).

So…if you get a letter from the IRS, don’t panic. Realize that you need to take it seriously and respond in a timely fashion, but know that you have rights in the process and methods to soften the blow of this unexpected and unwanted expense.

Jane Bruno is a tax consultant in Palm Beach Gardens, FL who specializes in tax issues for American overseas. She can be reached at: janebruno@bellsouth.net or by calling: +1 561 222-9273.