What to Expect and How to Resolve Indiana Tax Debt
The Indiana Department of Revenue (DOR) takes Indiana back taxes very seriously. If you don’t pay your tax liability when due, the state starts collection actions very quickly. The DOR also assesses penalties and interest on late tax payments and unfiled returns. However, there are resolution options. The IN DOR offers individual and business taxpayers multiple ways to make arrangements on their state tax debts.
Here is an overview of what to expect and how to get help if you owe Indiana back taxes. Need help now? Then contact us at the W Tax Group today. We have extensive experience helping people resolve their tax debts with the IRS, the Michigan Department of Treasury, the Indiana DOR, the New York Department of Taxation and Finance, the Illinois DOR, and all other states.
Options to Resolve Indiana Back Taxes
Do you owe back taxes in Indiana? Are you getting ready to file a tax return but you can’t afford to pay the tax liability? In both cases, there are options. Here is a brief overview of the tax relief programs in this state.
Payment Plans for Indiana Back Taxes
If you can’t afford to pay your Indiana taxes in full, you can request a payment plan. You must wait until the DOR has processed your tax return. Then, you can go online to set up a payment plan, or you can hire a tax pro to help you through the process.
Typically, individuals must owe at least $100 to set up a payment plan. You can take up to 12 months to make payments on up to $1,000 in back taxes. The DOR gives you up to 24 months if you owe over $1,000 and up to $5,000. You can take up to 36 months to pay if you owe over $5,000 in individual income taxes.
Businesses must owe at least $500 to qualify for a payment plan. They can also take up to 36 months to pay off their back taxes. When you apply for a payment plan, you can opt for monthly or bi-weekly payments.
Indiana Offer in Compromise
If you can’t afford to pay in full or make monthly payments, you can apply for an offer in compromise in Indiana. This is when the state agrees to accept less than you owe and write off the rest of the tax debt. Rather than applying directly to the IN DOR, you go through the Indiana Taxpayer Advocate Office.
Much like the IRS Taxpayer Advocate Office, this is an independent entity within the DOR, and its role is to help taxpayers with complex problems.
To apply, submit Form FS-OIC (Offer in Compromise). However, if you also need to apply for an IRS offer in compromise, you can send your IRS OIC application along with supporting documents or a copy of your IRS OIC approval instead.
Once accepted, you typically must pay the tax settlement within 60 days, but in some cases, you can negotiate longer payment terms.
Hardship Status When You Can’t Afford to Pay Indiana Taxes
If you can establish hardship, the DOR will pause collection actions on your account or let you set up a payment plan with expanded terms. For instance, if you demonstrate financial hardship, the DOR may accept a payment plan with smaller monthly payments or longer payment terms than usual. If the DOR suspends collection actions on your account, your state tax bill does not go away. Rather, this is just a temporary pause, and the DOR ultimately expects you to set up a payment plan.
To qualify for hardship, the tax debt must be threatening your livelihood, or you must have recently lost your job or been forced to change jobs. Alternatively, you can qualify if you’ve gone through a natural disaster or an uncontrollable event such as a house fire, or if you or an immediate family member is suffering from a terminal illness. To apply, file Form FS-H (Hardship Financial Statement) with the Indiana Taxpayer Advocate Office.
Injured Spouse Relief
You may qualify for injured spouse relief if your Indiana back taxes are due to a tax liability related to your spouse. Generally, your spouse must have intentionally underreported income or overclaimed deductions without your knowledge, but there are a few other scenarios where you may qualify. Because this is a complicated tax resolution program, you should reach out to a tax attorney. They can help you determine if you are likely to qualify.
You can also apply for injured spouse relief if the refund from your jointly filed tax return was seized to cover your spouse’s debt. For instance, if the DOR takes a tax refund due to your spouse’s unpaid child support, you can apply to have your portion of the refund sent back to you.
To apply for injured spouse relief when you file your state tax return, tick the box on Line 5, Schedule 7. If you want to apply for injured spouse relief after receiving a tax assessment or having your refund offset for your spouse’s debt, you should file Schedule IN-40PA (Indiana Post-Liability Allocation Schedule). Note that the DOR takes months to process injured spouse claims.
The DOR may be willing to abate penalties if you can show that you had reasonable cause to file or pay late. To apply for penalty abatement, you need to reach out to the DOR and explain why you paid or filed late. The DOR won’t waive the penalties if it believes the late filing or late payment was due to negligence.
You must request penalty abatement quickly. According to the DOR, you must protest penalties within 60 days of receiving a tax assessment that includes penalties. If you miss the deadline, you waive your right to protest. However, if you know that you’re going to file or pay late, you can reach out proactively to ask the DOR to waive the penalties. You must do this by the last day of the filing period.
Appealing an Indiana Tax Assessment
You have the right to appeal if you don’t agree with a tax assessment in Indiana. Typically, a tax appeal comes into play when the department assesses additional tax against you after reviewing or auditing your tax return.
To appeal, you must send a written protest to the DOR within 60 days of the date on the proposed assessment notice. Explain why you disagree and include supporting documents. If you don’t protest within this time frame, you waive your right to appeal, and the DOR will send you a demand for payment.
If you don’t agree with the tax liability shown on the demand for payment, the DOR advises you to pay the tax liability within 20 days, and then request a refund for the disputed amount. If you can’t pay in full within 20 days, consider paying a third of the tax bill. Then, the DOR will generate another demand for payment with a 20-day due date. At that point, pay half of the remaining bill, and the DOR will generate another 20-day demand notice. Pay the final amount due to avoid further collection actions.
If the DOR doesn’t agree with your protest, you can request a hearing by writing to the DOR’s legal division:
Indiana Department of Revenue
PO Box 1104
Indianapolis, IN 46206-1104
If you realize that you don’t have all of the information you need, you can request more time at the hearing. Unfortunately, you won’t get a decision at the hearing. Instead, the DOR will send you a Letter of Findings within 60 days after the hearing.
If you disagree with the Letter of Findings, you have 60 days to request an appeal with the Indiana Tax Court. If you pay the tax and apply for a refund and the DOR denies the refund claim, you have 90 days to appeal to the State Tax Court.
What Happens If You Don’t Pay Indiana Taxes?
If you get behind on your Indiana tax obligations, the IN DOR will assess penalties on your account. The DOR can also forcibly collect unpaid state taxes through tax warrants, wage garnishments, and property levies. Here is what to expect if you owe Indiana back taxes.
Penalties for Not Paying Indiana Taxes
The DOR will charge a 10% failure-to-pay penalty if you don’t pay your tax on time. For instance, if you owe $5,000, the penalty will be $500. The minimum penalty is $5. If you don’t file your state tax return and the DOR files a return on your behalf, you will incur a 20% penalty. In other words, the penalty is cut in half if you file and don’t pay compared to not filing at all. Businesses also incur a 20% penalty for filing returns late.
If the DOR finds out that you didn’t file a tax return because you were trying to evade tax, the penalty is 100% of the tax liability. The DOR also assesses the following penalties:
- $35 for bad checks
- $10 per return if you fail to file information returns. This is capped at $25,000.
- $10 per day (up to $250 max) if you fail to file a corporate or partnership return reporting zero tax liability.
- $10 for late Schedule K1 information returns.
To minimize your penalties, try to file returns on time and address back taxes as soon as possible.
Tax Warrant for Unpaid State Taxes
If you ignore the demand for payment, the Indiana DOR can issue a tax warrant against you. This is also called a lien, and the DOR gets filed in the county clerk’s office in every Indiana county where you have assets.
The warrant will create a tax lien against all of your vehicles. This means that if you sell the vehicle, the DOR has the legal rights to the proceeds of the sale up to the amount of your tax debt plus penalties, interest, and collection fees. The lien also makes it practically impossible to borrow against your vehicles.