Here's a listing of commonly-held beliefs about what the IRS can and cannot do regarding collecting taxes.
In my consultations with taxpayers, I hear a lot of pre- conceived notions that are just downright wrong when it comes to the IRS. Believing some of these myths could get a person into a lot of trouble, and some of them could lead to complete financial devastation:
"If the IRS garnishes my wages, they have to leave me with a "livable" wage."
False. In wage garnishment situations, the IRS has a table that they refer to (IRS Publication 1494) - that determines how much money they will leave in your paycheck per week.
Many people believe that the IRS takes a certain percentage of your pay, which is simply not true.
The only factors that determine how much of your paycheck is left over for you and your family after a garnishment is your marital status, the number of exceptions that you claim and whether you're 65 years old and/or blind.
For example, if you're married and you file a joint return and claim 2 tax exemptions, the IRS will allow you to keep $336.54, regardless of how much you earn. It makes no difference if you make $5000/week or $500/week. You take home $336.54 and the IRS keeps the rest until your tax debt is paid off.
"If I don't hire a lawyer to handle the IRS for me, the IRS will give me a break since I'm on my own".
False. The IRS has one job - to collect your money using whatever legal means necessary. The IRS is the most powerful collection agency in the U.S. No other institution has the legal power to seize your property, garnish your wages, help itself to your bank account, place a tax lien on your property and/or throw you in jail...just to get you to pay a debt. By representing yourself, you are opening yourself up to be intimidated by people who deal with these kinds of issues every day. If you don't know your rights, the IRS can walk all over you and you may end up paying a lot more than you would have by having legal representation at your side.
"The only way I could ever get away with paying the IRS less than the total amount of what I owe is to declare bankruptcy".
False. While bankruptcy may discharge many (but not necessarily all) federal taxes, it's not the only way to pay less than you owe to the IRS and "get away with it".
The IRS offers two other debt-reduction methods that do not require full payment of the tax to satisfy the debt.
The first is called an Offer-In-Compromise, where an offer is made to the IRS based on what you can reasonably afford to pay over time. The IRS may accept the offer, which could be substantially less than the total amount due. There have been cases where taxpayers have paid only 10-15% of their total tax bill and had the rest forgiven with an Offer-In- Compromise.
Unfortunately, the IRS has shown a significant decrease in the last few years accepting Offers-In-Compromise. In 2006, it rejected nearly 85% of all offers that were made. The IRS has also begun charging a $150 filing fee for Offers-In- Compromise in an effort to stem the tide of "frivolous"
offers being made.
One relatively new method for paying less than you owe is called a Partial Payment Installment Agreement. Using this method, you consider how much you owe, plus penalties and interest. Once the total is calculated, you divide that number by the amount of time that's left on the Statue of Limitations to collect the tax. So, if the tax has been recently assessed, you have a full 10 years to pay back the tax.
However, once you come up with this number, if you can prove to the IRS that this payment amount is still too much, you can come to a Partial Payment Installment Agreement to pay it off. If the total amount paid at the end of the 10 years is less than the original amount owed, the IRS will forgive the rest of the debt.
The only "downside" to the Partial Payment Installment Agreement is that is reviewed every 2 years. If the IRS determines that you are able to pay more, it will adjust your payment amount higher.