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If You Owe The Government Money

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What Happens If You Can’t Pay Your Taxes


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What happens if you complete your tax return and find that you can’t pay the amount you owe?

This isn’t supposed to happen. You’re supposed to pay income taxes gradually throughout the year so that in April you won’t owe much or will even be entitled to a refund of overpaid taxes. Employees have income tax withheld from their paychecks. Self-employed taxpayers pay quarterly estimated taxes directly to the Internal Revenue Service .

But sometimes your life situation changes or an unusual one-time event occurs during the year. When you prepare your annual return, you may get an ugly surpriseyou owe hundreds or thousands of dollars that you didn’t expect and simply don’t have.

While this isn’t a good situation to be in, it’s not the end of the world. There are a number of ways to resolve it.

The Tax Refund Process

You can request a tax refund from the government by filing an annual tax return. This document reports how much money you earned, expenses, and other important tax information. And it will help you to calculate how many taxes you owe, schedule tax payments, and request a refund when you have overpaid.

Once the government gets your tax return and processes your information, it officially approves you for a refund before sending off your money. Tax refund processing varies depending on the way that you file your taxes.

Refunds for tax returns filed electronically are generally sent out less than 21 days after the IRS receives your information, though they can take up to 12 weeks to show up. Refunds for tax returns filed on paper often arrive between six and eight weeks.

You could be wondering, why does my tax refund take so long to show up?

Delays can happen as a result of mistakes, budget cuts and overwhelmed tax preparers. The timelines that the IRS provides are only estimates, so its probably not a good idea to count on using a refund to make an important payment or purchase.

In some cases, you might be tempted to take out a refund anticipation loan. Sure, youll get your money earlier. But as a consequence, you may have to pay a hefty fee and interest.

Request A Payment Extension

Filing a six-month tax-filing extension using Form 4868 won’t help. This extension only gives you more time to file your paperwork it doesn’t give you more time to pay what you owe.

Filing your return on time can help minimize the penalty and interest charges assessed by the IRS. The IRS’s late payment penalty is 0.5% per month, up to a maximum of 25% the late filing penalty is 5% per month, up to a maximum of 25%. So simply filing your return on time can save you a substantial amount in penalties.

If you believe you have a legitimate case due to undue hardship, you can file Form 1127 to request a six-month payment extension. Along with this form, you’ll have to submit a statement of all your current assets and liabilities and an itemized statement of all the money you’ve received and spent in the last three months.

The IRS rarely grants payment extensions, and it will only be granted if you can demonstrate undue hardship. If you just bought a 60″ flat-screen TV last month because you had no idea you were going to owe $5,000 in taxes, you’re not going to qualify for a hardship extension.

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Can I Appeal A Lien Filed By The Irs


You may ask an IRS manager to review your situation.

Or you can request a Collection Due Process hearing with the Office of Appeals. You must request this hearing by the date on your notice. If you are unsuccessful at the hearing, you will have 30 days to dispute that decision.

You can also attempt to work with the IRS so that your debt is paid off some other way.

Registering A Lien On Assets

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Once the debt is certified, the CRA can register a lien against your assets and property, including your personal residence. Registering a lien will secure the amount of debt owing, by establishing creditor priority in the event of a sale. This means, if you sell your asset, your CRA tax debt is automatically paid from the proceeds of the sale, before you receive any remaining proceeds.

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What Happens When You File For Bankruptcy

Filing for bankruptcy will have major repercussions on the rest of your finances. It will discharge you from unsecured debts, which includes credit cards, payday loans, amounts owing to utility companies, student loans under certain circumstances, and tax debt.

The downside is that you will have to sell any non-exempt assets you own to pay off your creditors, as well as 50% of any surplus income over a certain threshold.

Bankruptcy will provide CRA debt relief, but it will come at a cost. Some of the assets that could be liquidated if you declare bankruptcy include:

  • Vacation and investment properties that are not your primary residence
  • Secondary vehicles
  • Non-RRSP investments, including TFSAs, as well as RRSP contributions made in the 12 months before filing
  • Jewelry, artwork, collectibles, and other valuables.

In addition to surrendering assets, you will also have to make surplus income payments for 21 months until you are finally discharged from your debts. Surplus income payments are 50% of any net income earned above a certain threshold that depends on the size of your family. It should give you enough to live, but the payments can be considerable depending on your income.

If you owe money to the CRA, bankruptcy will eliminate those debts, but these are all factors to consider. Talk to an insolvency trustee about your options.

Search For Money From Insurance

  • VA Life Insurance Funds Search the U.S. Department of Veterans Affairs database for unclaimed insurance funds.

  • The VA may owe money to current or former policyholders or their beneficiaries.

  • This database doesnt include funds from:

  • Servicemembers Group Life Insurance

  • Veterans Group Life Insurance policies from 1965 to the present

  • FHA-Insurance Refunds If you had an FHA-insured mortgage, you may be eligible for a refund. FHA insurance refunds are issued by the U.S. Department of Housing and Urban Development .

  • Search the HUD database with your FHA case number. Case numbers have three digits, a dash, and the next six digitsfor example, 051-456789.

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    Federal Refund Reduced Because Of A Virginia Tax Debt

    If you have delinquent debt with us, we can submit a claim to the U.S. Treasury Offset Program to withhold or reduce any of your federal income tax refund by the amount of your tax debt. The claim may also be applied to eligible federal vendor payments for businesses with outstanding debt.

    If you receive a letter from us regarding a debt submitted to the TOP, and you think youve already paid the amount due or dont owe it for other reasons, please contact us.

    Apply For An Installment Agreement

    How to Claim “Free” Money the Government Owes You! (No Joke)

    If you think it will take you more than a few months to pay your tax liability, consider applying for an installment agreement. You can apply online at or by mail using Form 9465-FS.

    An installment agreement can prevent the IRS from taking enforced collection action. You’ll still owe penalties and interest, but your monthly payments let the IRS know that you intend to make good on what you owe.

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    How To Get Back On Track If You Owe The Irs Money

    Five simple steps you can take now to get your tax debt under control:

  • Read the letters or notices IRS sends carefully to better understand the issue. If you still dont get why youve received a letter or notice, you can look it up here or contact a tax professional.
  • If you received a letter from the IRS, it is usually to notify you of a:

    • Balance due
    • Larger or smaller refund than expected
    • Question about your tax return
    • Delay in processing your return
    • Change made to your return

    The IRS may also simply need additional information or to verify your identity or return information.

  • Respond to the IRS in a timely manner to minimize fees, such as additional interest and penalty charges, and to preserve your appeal rights.
  • Resolve your debt by making payments when agreed upon, even if you cant pay the full amount owed.
  • Retain copies of letters, notices and/or agreements you may need these later.
  • Does Bankruptcy Clear Tax Debt In Canada

    When you file for bankruptcy, you enjoy CRA debt relief along with relief from all other unsecured creditors. The common belief that you cant escape tax debt this way comes from the past. Before 1992, the Canada Revenue Agency was considered a preferred creditor in the Bankruptcy and Insolvency Act, and it could use this status to oppose a debtors discharge from income tax debt.

    Since 1992, it has been listed as an ordinary unsecured creditor on the same level as any bank, credit card company, or other lenders. CRA debt can now be discharged unopposed.

    There are some exceptions to this rule, including those who owe over $200,000 in taxes, and that number represents more than 75% of their proven debts. Otherwise, as a general rule, if you owe Revenue Canada money, insolvency can help.

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    The Irs Must Treat You Courteously

    The IRS publication entitled “The IRS Collection Process,” revised in 2018, says that you have a right to representation by an attorney, CPA, or enrolled agent and to be treated in a professional, courteous manner. If you do not like the way you are being treated by an IRS representative, you can stop the interview and ask to speak with a supervisor.

    Why Are States Able To Hold Onto Unclaimed Money

    Does the Government Owe You Money?

    A business or government office is usually required by state law to attempt to contact the rightful owner of money or property it’s holding. When they’re unable to locate the rightful owner after a period of time, they’re required to send the unclaimed item to a state-run unclaimed property office. Some states may say the property has been “escheated,” meaning the item has been transferred to the state. The state office will hold these items until their owner claims them.

    In most US states, finding out if you have any unclaimed property is free and easy. Claiming is also free but can be a bit more work, depending on which documents you need to collect and then send to the state to prove that you’re the rightful owner.

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    You May Be An Innocent Spouse

    Are you widowed, divorced, or separated? Do you have tax problems that arose out of the actions of your former spouse? If you can show that you played no role in your former spouse’s actions to avoid paying taxes, you may be entitled to innocent spouse relief. That relief could result in the entire tax bill being written off. Individual states also grant innocent spouse relief.

    Paye Overpayments And Underpaymentsof Tax

    An overpayment of tax happens when you have paid more tax than you wereliable to pay. If you have overpaid tax you will get a tax refund. You mustclaim a tax refund within 4 years after the end of the year of the overpaymentor you will not get the rebate. To claim tax back you must get a Statementof Liability from Revenue.

    An underpayment of tax is when you have paid less tax than you were liableto pay. If you have paid too little tax you will owe Revenue the differencebetween what you actually paid and what you should have paid. You may not knowthat you have paid too little tax, but you are still responsible for payingRevenue if an underpayment of tax has occurred. If you are a PAYEtaxpayer and you are registered with Revenue’s PAYE Services you can viewyour tax credit certificate online. You can do this using Revenue’s myAccount Serviceonline or on mobile and tablet devices using Revenue’s RevApp.Your tax credit certificate will show the tax credits that your employer isdeducting from your tax bill. If you find out during the year that your taxcredits are not correct you should contact Revenue and any refund you may bedue will be paid to you by your employer. It is also important to check you arenot claiming tax credits you are not entitled to, as this will result in anunderpayment of tax.

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    The Irs Has Put A Lien On My Property What Does This Mean

    When the IRS puts a lien on your property, it does not mean that they have taken it. It means that they have put a claim on it so that they can make sure they get your debt paid back.

    A lien will prevent you from selling or transferring your house freely. If you are selling, the IRS can get money from the buyer before you are paid.

    A lien will also affect your credit rating, making it difficult to buy other property.

    The IRS must give you notice at least 5 days before they file the lien.

    The IRS must take the lien off within 30 days of your payment of the debt. You will also have to pay all interest and penalties.

    The IRS must release the lien 10 years after they claim the debt.

    What Happens If I Owe The Va Money

    What To Do If You Owe The IRS and Can’t Pay – Overview

    So, you owe the government moneyspecifically the Veterans Administration.

    Many times, people receive letters from the VA stating that they owe the VA money or that at some point in time they were overpaid and now they have to pay the money back to the VA. An overpayment is money you receive that is not rightfully owed to you. Let me explain why this may occur and how it can be handled.

    First of all, you must report an overpayment immediately. Overpayments may occur due to an error at the VA. They simply may have overpaid you or forgot to change your status from married to single, for example. However, if you intentionally give false information to the VA or do not report changes, this can lead to overpayments and also a termination of benefits.

    If you are receiving VA compensation or pension benefits and a felony warrant is issued for your arrest or you are arrested, you are not eligible to receive your monetary benefits. If a warrant is filed against you, it is your responsibility to notify the VA immediately so you are not overpaid. If you continue to receive this money while the warrant is out or you are in prison, you will need to repay the money to the VA.

    If you were once married and received money for your spouse and you become divorced, you must report this to the VA so you are no longer paid for your spouse. This also includes if you were being paid for step-children, you become divorced and the children no longer live with you.

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    Refunds From Tax Credits

    While taxpayers usually forfeit their tax credits when they owe nothing, you may qualify for a tax refund through these exceptions:

    • The Child Tax Credit in 2021 pays a maximum of $3,600 for every child that qualifies as a dependent. The credit was $2,000 per dependent in years past but was expanded as part of the American Rescue Plan, signed into law by President Biden in response to the COVID-19 pandemic. For 2021, the CTC is fully refundable. This is different from past years when it was only refundable up to $1,400. In other words, if you qualify for the CTC for tax year 2021 and it brings your tax liability below zero, the IRS will send you the remaining amount.
    • Taxpayers who earn low-to-moderate income may qualify for the Earned Income Tax Credit , which reduces the tax amount that you owe and could entitle you to a refund.
    • The American Opportunity Tax Credit helps taxpayers offset higher education costs paid on behalf of eligible students. The annual credit is worth $2,500 per student. If the credit drops your tax liability to zero, the IRS will refund up to 40% of any remaining amount of the credit .

    You May Face A Delay If You Claim These Tax Credits

    There are a couple of issues that could cause delays, even if you do everything correctly.

    The IRS notes that it can’t issue a refund that involves the Earned Income Tax Credit or the Child Tax Credit before mid-February. “The law provides this additional time to help the IRS stop fraudulent refunds from being issued,” the agency said this week.

    That means if you file as soon as possible on January 24, you still might not receive a refund within the 21-day time frame if your tax return involves either of those tax credits. In fact, the IRS is informing those who claim these credits that they will most likely receive their refunds in early March, assuming they filed their returns on January 24 or close to that date.

    The reason relates to a 2015 law that slows refunds for people who claim these credits, which was designed as a measure to combat fraudsters who rely on identity theft to grab taxpayer’s refunds.

    With reporting by the Associated Press.

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    How To Find Unclaimed Money

    If a business, government office, or other source owes you money that you dont collect, it’s considered unclaimed. Unclaimed property can include many things, including cash, checks, money orders, security deposits, or the contents of safe deposit boxes.

    The federal government doesnt have a central website for finding unclaimed money. But you dont need to hire a company to find unclaimed money for you. You can find it on your own for free, using official databases.

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