Retirement – How to Handle IRS Tax Debt During
It can happen to anyone. You made a financial decision or two – whether in your personal life or in business – that left you owing a hefty tax bill to the IRS. Now an IRS Revenue Agent – typically referred to as an Auditor – is breathing down your neck. You’re not unwilling to pay what you owe, but you are at or near retirement. Maybe you just don’t have the cash to pay the balance in full. Or perhaps you’re worried that if you do, you’ll jeopardize your financial security in the years to come. If you are dealing with tax debt during retirement, here’s what you need to know about your options and what the IRS can and can’t do with your retirement assets.
Don’t Ignore IRS Correspondence
Open all correspondence that you receive from the IRS and don’t expect that if you ignore the IRS, the debt will go away. The IRS has broad collection powers. Depending on your situation, they may be able to garnish your Social Security payments, seize bank and retirement accounts, and business and personal assets. They may be able to revoke your passport or send a private collection agency after you. But they are typically willing to work with people who are upfront and communicative. Let them know that you are willing to cooperate and work out a plan for paying your debts and you’re more likely to avoid the IRS’s most aggressive collection tactics.
Retirement Accounts and Pensions
In most cases, the IRS is cautious about seizing retirement assets for people at or near retirement. Putting seniors in financial peril looks bad, so aggressive collection against retirees is typically saved for the most egregious cases. Still, it’s important to know what the IRS can and can’t access. That depends on the type of account and the particular situation.
The general rule of thumb is that if you don’t have access to the money, neither does the IRS. So of you are under age 59½, still working, and do not have access to the funds in a pension or retirement plan, neither does the IRS. Even if you have access to the funds through a hardship withdrawal, the IRS generally cannot access that account. However, if you are age 59½ or older and currently taking distributions from the account, the IRS may be able to access those funds.
Before seizing retirement accounts, IRS procedures requires that the agency consider three factors:
- Is there other property that can be used to pay the debt or can an alternate payment arrangement be reached?
- Has the taxpayer’s conduct been flagrant? Flagrant activity includes tax evasion, illegal income, and not cooperating with the IRS.
- Does the taxpayer need the retirement assets for necessary living expenses?
The IRS should not seize retirement assets if you are willing to work out other payment arrangements, have been cooperative, and need those retirement funds to pay living expenses. IRS levies should not put you in economic hardship.
Social Security Income
If you are currently collecting Social Security retirement benefits, the IRS can levy your benefits. However, in most cases, they will not levy more than 15% of your benefits to pay the delinquent tax debt.
Social Security income is levied through the Federal Payment Levy Program (FPLP). You can prevent the IRS from tapping your Social Security retirement benefits if your income is at or below certain established levels, based on the Department of Health and Human Services poverty guidelines.
Before including your Social Security benefits in the FPLP, the IRS will send a final notice of their intent to levy. If they do not hear from you, they will send an additional notice explaining that your Social Security benefits may be levied. You then have 30 days to make other arrangements to pay your debt before the IRS begins deducting 15 percent of your monthly benefit.
To prevent the IRS from levying your Social Security income, or to have an existing levy released, you will need to submit a financial statement proving that you cannot afford to have your Social Security benefits reduced. It’s a good idea to have an experienced and licensed tax relief professional assist you with preparing the financial statement and submitting it along with supporting documentation, such as bank statements and proof of living expenses.
The IRS does have the ability to seize any property you own, including your home. However, the IRS is not in the habit of putting retirees out on the street. According to the most recent report from the Treasury Inspector General for Tax Administration, from July of 2014 through June of 2015, there were only 428 seizures of real and personal property out of millions of delinquent tax accounts. Clearly, seizures of property are not high on the IRS’s list of priorities. In most cases, the IRS will only go after your home if you have a lot of equity or if you have committed tax fraud.
Statute of Limitations
In general, the IRS has ten years to collect delinquent taxes. If you truly do not have the ability to pay your delinquent taxes, the IRS may place your account in Currently Not Collectible (CNC) status. When your account is in CNC status, the IRS will temporarily suspend collection actions. However, it’s important to know that penalties and interest continue to accrue on your account and the IRS will monitor your income during this time. They may reopen your account if your financial situation improves in the future.
If you maintain CNC status until the ten-year statute of limitations runs out, the IRS generally cannot pursue collection after that time, even if your financial situation later improves.
Keep in mind that the ten-year statute of limitations applies only to federal tax debts. State statutes vary. For instance, in California, there is a 20-year statute of limitations on the collection of back taxes. Your tax relief professional will be able to provide you with the most favorable tax resolution based on the facts and circumstances of your specific case.
Not only are we licensed Tax Relief Specialists, we are also former Senior IRS Agents who now serve the best interests of taxpayers like you – all we do is handle IRS Tax Relief matters, all day every day.