Keith Mack
Federal and state tax returns are considered confidential and protected by federal law, and the Internal Revenue Service (IRS) is barred from using the information for reasons other than tax administration. However, there are exceptions to this rule, such as when a taxpayer authorises the disclosure of their information or when required by law. For example, federal law allows government agencies to garnish an individual's tax refund to cover overdue taxes, student loans, or child support. Additionally, if an individual does not pay their taxes in full, the IRS will initiate a collection process, which includes sending a bill for the amount owed, plus any penalties and interest accrued.
| Characteristics | Values |
|---|---|
| Tax collection process | If you don't pay your tax in full when you file your tax return, you'll receive a bill for the amount you owe, including any penalties and interest accrued on your unpaid balance. |
| Delaying collection | If you need more time to pay, you can request that the IRS delay collection and report your account as currently not collectible due to financial hardship. |
| Payment plans | You can set up an installment agreement to pay in installments. Interest and late payment penalties will continue to accrue. |
| Offer in compromise (OIC) | You may apply for an OIC, an agreement to resolve your tax liability by paying a reduced amount. |
| Tax return confidentiality | Federal and state tax returns are considered confidential and protected by federal law. |
| Disclosure laws | There are exceptions to tax return confidentiality, including court subpoenas, valid requests from legislative oversight committees, and certain government agencies. |
| Garnishing tax refunds | Only state and federal government agencies can garnish your tax refund to collect overdue taxes, student loans, child support, or other debts. Private creditors cannot access your tax refund directly. |
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What You'll Learn
Tax return confidentiality and disclosure laws
Federal law requires the Internal Revenue Service (IRS) to keep all information in tax returns confidential. The IRS is barred from using the information for anything other than tax administration purposes. The IRS has also implemented rules to prevent the unauthorised disclosure of information by tax return preparers. The Internal Revenue Code (IRC) states that " [federal tax] returns and return information shall be confidential". This safeguard covers all information related to the returns, such as tax liability, tax payments, and efforts to collect unpaid taxes. The IRS is even prohibited from disclosing whether an individual has filed a tax return.
There are, however, some exceptions to this rule. Taxpayers may request that the IRS disclose their tax records to a third party by providing written authorisation. Taxpayers may also authorise a third-party designee by checking a box on their return. Taxpayers are free to disclose anything about their own tax returns, but the IRS cannot comment on anything voluntarily disclosed.
In some limited situations, return information can be disclosed without the taxpayer's consent. These include court subpoenas or valid requests from legislative oversight committees. For example, committees of Congress may request disclosure of taxpayer information in a closed executive session. State tax agencies and local governments must file a written request for federal tax information if not already authorised by the taxpayer. A court may also order that tax information be shared with law enforcement agencies for the investigation and prosecution of non-tax crimes.
The IRS may make limited disclosures to third parties as needed to obtain information that is not otherwise readily available. Certain tax return information may be disclosed to the Social Security Administration and other specified federal agencies as needed. The IRS may also share information with the SSA about Social Security and Medicare tax liability if necessary to establish the taxpayer's liability. This provision does not allow the IRS to disclose tax information to the SSA for any other reason.
Violations of IRS tax return confidentiality law may be charged as felonies, with punishments of up to five years in prison and $250,000 in fines. Victims of unlawful disclosure of tax matters may also sue for damages of $1,000 or more for each act. Federal employees convicted of this crime must be fired, in addition to facing criminal charges and potential civil liability.
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Garnishing a tax refund
Federal law permits only state and federal government agencies to garnish tax refunds as payment towards a debt. Private creditors, such as credit card companies, do not have direct access to an individual's tax refund. However, once the refund is deposited into a bank account, private creditors may have access to those funds, depending on state laws.
The Treasury Offset Program (TOP) is administered by the United States Department of Treasury's Financial Management Service (FMS). This program allows federal and state government agencies to collect outstanding debts by garnishing an individual's tax refund. The Internal Revenue Service (IRS) has priority in garnishing tax refunds, and it pays itself first before other government agencies can garnish the remaining amount.
If an individual has overdue child support payments, the state agency governing child support orders will have the first claim on the tax refund. State government agencies generally have the lowest priority in garnishing IRS refunds. However, if there are unpaid state income taxes or other specific obligations, such as returning unemployment compensation payments, the federal refund can be garnished to repay these debts.
It is important to note that if an individual is married and filing jointly, they may be able to protect part of their refund from garnishment under the "Non-Obligated Spouse" rule. In such cases, the refund can be divided between spouses, and garnishment will only apply to the portion tied to the spouse with the debt.
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Collection process
The collection process for overdue tax payments is a serious matter, and there are several stages to the process. The first step is to receive a bill for the amount owed, plus any penalties and interest accrued. This bill is sent after a tax return has been filed, and the tax has not been paid in full. The bill will include a detailed breakdown of the tax owed, any penalties, and interest, along with an explanation of the reasons for these charges and a statement of the taxpayer's rights and obligations.
If the taxpayer is unable to pay the full amount, they may be able to delay the collection process by requesting that their account be reported as "currently not collectible." This does not remove the debt but acknowledges that the taxpayer cannot afford to pay at that time. To approve this request, the IRS may require a completed Collection Information Statement and proof of financial status. The debt will continue to accrue interest and penalties during this delay.
If the taxpayer does not respond to the initial bill, the IRS may take further action. This could include issuing a levy, garnishing wages, seizing assets, or filing a Notice of Federal Tax Lien, which is a legal claim on the taxpayer's property. The IRS may also use private collection agencies to collect overdue tax payments. These agencies can provide information on payment methods but cannot take enforcement action. The taxpayer is responsible for any collection agency fees incurred.
For businesses, the consequences of non-payment of sales tax can include the revocation of licenses and sales tax business certificates, which would prevent the business from making taxable sales until the situation is rectified.
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Payment plans and methods
Payment Plans
The Internal Revenue Service (IRS) offers various payment plan options, commonly known as installment agreements, to provide taxpayers with flexibility in settling their tax liabilities. These plans allow taxpayers to pay their taxes within an extended timeframe. Here are some key considerations regarding payment plans:
- Simple Payment Plan: Most individual taxpayers qualify for a Simple Payment Plan if their total balance of tax, penalties, and interest owed is $50,000 or less. This plan generally requires full payment within 10 years from the date the tax was assessed.
- Guaranteed Installment Agreement: This option is available to individuals who owe $10,000 or less in taxes, excluding interest and penalties. To be eligible, taxpayers must have timely filed all income tax returns and paid any income tax due in the past 5 years. They must also agree to pay the full amount within 3 years and comply with tax laws during the agreement period.
- Long-Term Payment Plan: This plan is suitable for those who owe $25,000 or less in combined tax, penalties, and interest. It requires filing all necessary returns and can be set up online through an IRS Online Account.
- Short-Term Payment Plan: This plan is available for taxpayers who owe less than $100,000 in combined tax, penalties, and interest. It offers a repayment period of up to 180 days and can be requested by calling the IRS.
- Online Payment Agreement: Taxpayers can use the Online Payment Agreement application to set up a long-term payment plan. This option has a lower user fee compared to other application methods. It provides an immediate determination for the proposed payment plan.
- Pre-Assessed Agreement: Even if you haven't received a bill from the IRS yet, you can establish a pre-assessed agreement by entering the anticipated balance from your tax return.
- Paper Form 9465: Alternatively, you can complete and mail Form 9465, Installment Agreement Request, or file it through tax filing software. However, this method may take up to 30 days or longer during the filing season for processing.
- Phone or In-Person Options: Payment plans can also be requested by calling the IRS or visiting in person. However, setup fees for these options tend to be higher.
Methods of Payment
The IRS accepts various methods of payment to provide convenience to taxpayers. Here are some common payment methods:
- Check: When paying by check, include your name, address, SSN, daytime phone number, tax year, and return type. Ensure that you mail the payment to the address provided in the correspondence.
- Direct Debit: You can set up a direct debit payment plan by providing your bank routing and account numbers. This method may result in a reduced fee if you apply online.
- Online: The IRS offers the option to make payments online through their Online Payment Agreement application.
- Mail: Payments can also be sent by mail to the address listed in the correspondence. However, consider mailing time when selecting your payment date to ensure timely receipt by the IRS.
- Credit Card or Bank Loan: Taxpayers may consider obtaining a cash advance on their credit card or taking out a bank loan to pay their taxes in full. These options may result in lower rates and fees compared to the interest and penalties imposed by the IRS.
It is important to note that regardless of the payment plan or method chosen, penalties and interest will continue to accrue on any unpaid balance until it is paid in full. Therefore, it is always in the best interest of taxpayers to pay their liabilities as soon as possible to minimize additional charges.
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Tax preparer disclosure rules
Tax preparers are subject to strict rules regarding the disclosure of client information. The Internal Revenue Service (IRS) prohibits the release of tax information by an IRS employee, as outlined in IRC Section 6103. However, there are exceptions to this rule, such as when information is shared with state agencies responsible for tax administration under IRC Section 6103(d).
Tax preparers are allowed to disclose information to other members of their firm to provide legal or accounting services to the taxpayer. This includes attorneys, accountants, and other employees or members of the same firm. For instance, an accountant who prepares a tax return may disclose information to another accountant in the firm for accounting statements or reports for the taxpayer.
Additionally, tax preparers may disclose information to individuals under contract with them for equipment or software-related services, but only to the extent necessary for the service, and the recipients must be informed of the rules and penalties under Sections 6713 and 7216.
Consent from the taxpayer is generally required for disclosures, and the preparer should document the process of obtaining consent. However, there are exceptions to the consent requirement, such as when disclosure is made under a court order or administrative request, or when updating the taxpayer's software to comply with IRS changes.
It is important to note that disclosure rules also apply to third-party appointees who are granted access to confidential tax information. These individuals are typically bound by the same confidentiality rules as IRS employees and are subject to constraints on disclosing information to third parties.
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Frequently asked questions
If you don't pay your tax in full when you file your tax return, you'll receive a bill for the amount you owe, which starts the collection process. This process continues until your account is satisfied or until the IRS may no longer legally collect the tax.
You may ask the IRS to delay collection and report your account as currently not collectible. You may also apply for an offer in compromise (OIC), which is an agreement between a taxpayer and the IRS that resolves a taxpayer's tax liability by payment of an agreed-upon reduced amount.
Federal and state tax returns are considered confidential and protected by federal law. However, there are exceptions where information can be disclosed without the taxpayer's consent, such as court subpoenas or valid requests from legislative oversight committees.
Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers also have the right to expect appropriate action against those who wrongfully disclose or use their tax information.
Federal law allows only state and federal government agencies, such as the IRS, state revenue departments, and child support enforcement, to garnish your refund to cover unpaid debts. Private creditors do not have access to your tax refund.
