Few things are as misunderstood as tax debt and the process by which the IRS collects it. These misconceptions aren’t just inaccurate, they can be dangerous. Misconceptions can cause people to not take tax debt seriously, which leads to them not making an effort to resolve it, which leads to serious consequences. On the other hand, some misconceptions have the opposite effect, causing people to become paralyzed with fear over what the IRS will do to them. Either way, misconceptions around IRS collections are harmful. Let’s take a look at some of these misconceptions and get to the truth.

Misconception #1: The IRS Will Forget About Unpaid Taxes

This is quite possibly the most dangerous misconception out there. People think that they can just ignore tax debt and it will go away. This is only partially true. Yes, it is true that the IRS has a time limit in which to collect unpaid taxes (10 years from the assessment date). However, 10 years is a long time, during which they will take collection actions against you, including wage garnishment and bank/property levies. Furthermore, that 10-year clock only starts once the tax is officially assessed. If you never file, there is no time limit on how long the IRS can wait to assess the tax—meaning they can come after you decades later to start that 10-year collection clock.

Misconception #2: If You Can’t Pay, You Shouldn’t File

This misconception is extremely prevalent and it’s easy to see why. If someone doesn’t have the money to pay, then why would they waste the time it takes to file their taxes? The answer is simple: penalties. The penalties for failure to file are higher than those for failure to pay. These penalties are as follows:

• Failure to File: When you do not file your taxes at all, the resulting penalty is 5% of the amount owed for every month or partial month that your debt goes unpaid. The penalty accrues up to a maximum of 25%.
• Failure to Pay: When you fail to pay the taxes you owe by the due date, the resulting penalty is 0.5% of the unpaid taxes for each month or partial month that the tax remains unpaid. This penalty also accrues up to a maximum of 25%.

As you can see, it is always in your best interest to file, even when you can’t afford to pay. It will save you money. Additionally, filing can preserve access to various tax resolution options that will not be available to you if you fail to file.

Misconception #3: The IRS Can Freeze Your Bank Account Without Warning

You will not wake up one day to find your bank account frozen without warning. While they will eventually place a levy on your bank account, they will only do so after sending 4-5 notices. The final of which will be titled “Final Notice of Intent to Levy and Notice of Your Right to a Hearing”. This final notice is legally required to be sent 30 days before any action takes place.

People also believe that once a levy is in place, nothing can be done. This simply isn’t true. After the account is frozen, the IRS must wait 21 days before seizing anything. You can get the levy lifted before this. Your best bet is to hire professional bank levy release services. These experts will contact the IRS, demonstrate your situation, and work toward a release, so you can regain funds before the 21-day window closes.

Misconception #4: The IRS Can Garnish Every Dollar You Earn

The IRS does use wage garnishment as a means of collection. However, the IRS will never take every dollar from your paycheck, no matter how much you owe. Instead of taking a fixed percentage, the IRS leaves you with a strictly regulated ‘exempt amount’ based on your filing status and dependents, and they seize absolutely everything else.  They will leave you with the “exempt amount” This is determined by your filing status and number of dependents, and is calculated using the IRS Wage Garnishment Table. In theory, the exempt amount that you are allowed to keep should be enough to cover basic living expenses.

What Taxpayers Should Do When Facing IRS Collections

When facing IRS collections, the worst thing you can do is nothing. You should not ignore notices, but read each one carefully. You should also take action and begin working towards a resolution. This can be done by trying to negotiate with the IRS directly, but it is often better to hire a tax debt resolution expert to help and guide you. They will ensure you get the best resolution option possible.

Veeramachineni Lalitha

I am Finance Content Writer. I write Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. My experience details : Linkedin