Late Tax Returns and IRS Debt? Yes...The IRS Can Do Bad Things as A Result
Unfortunately, it can do a number of things...mostly bad. Well...all bad really.
I am providing this list of the most common actions I see that the IRS takes against individual Americans.
Substitute Tax Return
"If any person fails to make any return required by an internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary, shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise"
This means that the IRS can prepare a return based on information it has at it's disposal or that it can find otherwise. It doesn't have to report deductions, expenses etc. So the return is done as a single person, with a standard deduction and it's creation usually results in a debt that is overstated, sometimes by tens of thousands of dollars.
It than uses this return to do some of the other bad things mentioned below.
The good news...if the return is wrong it can usually be "challenged" and fixed. We have saved clients literally millions of dollars in tax debt by simply doing the correct returns and "challenging" the IRS return during anaudit reconsideration process.
The IRS has the authority to take wages, federal payments, state tax refunds, bank account funds, and monies owed to independent contractors.
They don't need a court order, all they need is the "assessment of the tax debt" and some time to provide written warnings or final notices of intent to levy, that go unheeded.
If wages or federal payments are levied, the levy won't stop until of course it is released, you pay the debt or the statute of limitations on collection ends.
If the IRS levies your bank account, your bank must hold funds up to the amount that is owed for 21 days. This is done to give the bank a chance to make sure you own the account. After the 21 day period is up, the bank must send money with any accrued interest to the IRS.
A recorded Notice of Federal Tax Lien provides the IRS a legal claim to your property as security for payment of the debt. Before this notice can be filed though it must "assess" the debt, (see above), send a notice and demand for payment and you must refuse to pay or neglect to pay within 10 days of that notice. This process creates the lien and the notice of lien makes other creditors legally aware that the IRS is first in line.
The lien attaches to property even if is acquired after the lien is noticed out.
Releasing a lien can be very difficult.
Yes the IRS can sell your property. Recently, it has become more aggressive about seizing retirement accounts and homes as well.
The IRS will post a public notice of sale in a local newspaper and deliver a copy to you or send it certified.
After placing it, the IRS has to wait ten days before holding the sale, unless the items are perishable.
Before the sale, a minimum bid price is created. This is usually 80% of the forced sale value of the property, after liens are taken into account. This value can be appealed and sometimes needs to be as the more money that can be brought from the sale the less debt the taxpayer will have in the end.
Trust Fund Recovery Penalty
Where a business has held employment taxes from employee checks and hasn't sent the funds in to the IRS, the IRS can assess a penalty against the "responsible parties" called a "trust fund recovery penalty". That penalty consists primarily of the employees portion of the tax withheld and not the matching portion. This means that individuals become liable for the businesses debt. It is a difficult penalty to deal with as it isn't dischargeable in bankruptcy and the IRS will often assess it against everyone involved and let the chips fall "where the may".