That time of year has come again: tax season.
Across our city and the country, individuals are getting the last of their tax documents together, collecting their receipts, and either heading off to their accountant or settling down in front of their computer to prepare their Form 1040, along with state and local counterparts.
This highly entertaining diversion usually leads to one of two reactions – either plotting how to spend the tax refund, or complaining about tax rates being too high. (You would think that tax rates are at an all-time high given how much attention they get from our politicians. Actually, income tax rates are their lowest in over 50 years. But no one likes to write a check to the IRS.)
If you are among the unlucky who need to write a check to the U.S. Treasury to cover your tax liabilities, I suggest you put paying them near the top of your to-do list. Tax debts are among the hardest debts to be rid of, and the tax agencies among the most powerful creditors a person will deal with.
Obviously, your personal income tax debts can be charged to you (filing a return basically admits some liability in that regard), but if you run or own a business, many of those tax liabilities can fall upon you, the person, in the event the company does not pay its tax bill. These taxes include corporate income tax liability, and any liability for withholding taxes (employee’s income taxes, social security and medicare).
Once the tax liability is incurred, the IRS has more power to collect than does almost any other creditor.
While a credit card has to file a lawsuit and obtain a judgment in order to take action against your property, the IRS (via federal law) can begin wage garnishment, bank account garnishment and place liens on your real and personal property without having to go to court.
An IRS garnishment can take a higher percentage of your income than can a civil judgment creditor. Additionally, outstanding tax debt can impair your ability to qualify for SBA loans and other government-backed programs.
All in all, the federal government is serious in guaranteeing its ability to collect its own debts.
Tax debt gets favorable treatment under bankruptcy law, as well. While almost all consumer debt, including civil judgments, will discharge in a bankruptcy, the vast majority of tax debts do not discharge. Income taxes that are old enough and have been filed for long enough can be discharged, and most property taxes older than one year are dischargeable. “Trust fund” taxes (taxes collected for the benefit of others), however, are never dischargeable. So if your business is closing, a first step in dissolution should be to get right with Internal Revenue.
If you find yourself with a significant tax bill and cannot simply pay it off, you may feel stuck between a rock and hard place. The debt won’t go away, but it also can really do damage if pushed to collection by force.
The simple answer is to not ignore the problem. The IRS has made significant efforts over the years to soften its reputation and tactics as it relates to individuals and their tax debts. Contact the IRS and work with their customer service representatives to create a payment plan that allows you to meet your living expenses and honor your tax obligations. If you wish, it is often wise to speak to an experienced tax professional, who may be able to represent you and guide you through the available options to get that debt managed.
Finally, if your debt burden is simply too great to manage at one time, speaking to a bankruptcy attorney or debt management expert may help tackle other debts, leaving enough money to allow you to manage the IRS, state department of revenue, or county collector.
Once you understand the power available to collect, and the (relatively) permanent nature of tax debts, and place the proper priority on their repayment, your tax liabilities should be under your power to control.
