Alabama Back Taxes: Consequences and Tax Resolution Options
The Alabama Department of Revenue (ALDOR) collects individual and business income tax, estate tax, excise tax, withholding taxes, sales and use tax, and business and license taxes in the state of Alabama. If you have unpaid back taxes, the Collection Service Division of the ALDOR has the right to collect them from you involuntarily. This in-house collection department can garnish your wages, issue tax liens on your assets, seize your bank accounts, or order your assets auctioned off for sale.
If you owe back taxes to the state of Alabama, this guide explains your options and then explores what can happen if you don't pay your taxes. To get help with Alabama back taxes, contact an Alabama tax professional today.
Resolution Options for Alabama Back Taxes
To protect yourself from harsh collection activities, you need to contact the ALDOR as soon as possible and make arrangements to take care of your unpaid state tax liability. Luckily, the state of Alabama has many options for taxpayers who can't afford to pay their taxes in full including the following:
Payment Plan for Alabama Back Taxes
The ALDOR may be willing to let you pay off your back taxes in monthly installments. To apply for a payment plan on Alabama taxes, submit an Installment Payment Request with a Collection Information Statement to the ALDOR.
The Installment Payment Request requires you to note the proposed amount of your monthly payment and sign an affidavit agreeing to the terms of the payment agreement. The ALDOR accepts payment plans on a case-by-case basis, and all payment plans may be considered balloon notes where the balance is due at the end of the agreement.
For instance, if you owe $7,200 and the state agrees to accept monthly payments of $100 for four years, you will owe a balloon payment of $2,400 at the end of the agreement. Note that this example uses sample numbers to show you how the balloon payment works. These numbers do not take interest or penalties into account.
Include your first monthly payment with your request. Note that your payment plan may go into default if you get behind on future tax filing or payment requirements. The ALDOR can also revoke your payment plan if your financial situation changes and you can pay your tax liability in full.
Offer in Compromise
An offer in compromise lets you pay off your taxes for less than you owe, but the ALDOR does not accept offers in compromise when taxes are legally due.
If you owe Alabama state taxes, you will not be able to settle them for less than you owe through this type of program. However, you may be able to use penalty abatement to reduce the portion of your outstanding tax liability related to penalties. Or, if you qualify, you may be able to reduce your tax liability through the innocent spouse program.
Alabama Innocent Spouse Relief
Typically, when a married couple files a return together, they are jointly responsible for the tax due. However, under Alabama state law, you may qualify for innocent spouse relief if the following statements apply:
- The tax bill was due to the unreported or misreported income of the other person on your joint return.
- You were unaware and did not have reason to know that the income was not reported correctly.
- You have proof that you didn't know about the issue.
- It would be unfair to hold you responsible for the tax liability.
- You were granted innocent spouse relief from the IRS.
Note that laws can change, and in some cases, Alabama does not keep pace with federal law. For example, in 2011, a woman who was granted innocent spouse relief from the IRS was denied that same relief in Alabama. The federal law had been updated in 1998, but the state law had not followed suit yet.
To avoid these types of risks, you should work with a tax resolution specialist who is experienced with Alabama state taxes and not exclusively focused on IRS taxes.
Alabama Injured Spouse Allocation
In Alabama, you can also apply for injured spouse allocation. This applies in cases where your Alabama tax refund will be seized by the government to cover debts only owed by your spouse.
For instance, if your spouse owes child support or back taxes, the state can keep your refund. However, through this program, you can ensure that the state only keeps the amount related to your spouse and not the amount related to you.
To apply, file Form AL8379 (Injured Spouse Allocation). You will need to include copies of both your and your spouse's W2s and 1099s so that the ALDOR can calculate which portion of the refund is due to you. Here are comprehensive instructions on how to complete this form.
Penalty Abatement in Alabama
The ALDOR may be willing to waive penalties if you can prove reasonable cause. Reasonable cause includes death, major illness, natural disasters, inability to obtain records, reliance on the advice of a competent tax advisor, or reliance on the incorrect advice of someone from the ALDOR.
You may also be able to claim reasonable cause if you made an honest mistake — typically, this has to be a one-time error, not a repeated issue. To apply for a penalty waiver, submit Form PWR (Request for Waiver of Penalty) to the ALDOR.
If you disagree with an assessed tax, you have the right to appeal. You have 30 days from the date of the preliminary assessment to request a conference on your case. During the conference, you have the right to present your opinions and discuss your case with a designated hearings officer.
Then, the ALDOR will enter a final assessment. You can appeal a final assessment with the Alabama Tax Tribunal or Circuit Court. Additionally, if your preliminary assessment hasn't been finalized within five years of the date of entry, you can also appeal that assessment to these courts.
Alabama Tax Amnesty Program
A tax amnesty program allows qualifying people with unpaid taxes and unfiled returns to come forward voluntarily without facing persecution. Tax amnesty programs tend to be very infrequent. Alabama last had a three-month amnesty period in 2018.
In very specific cases, you may be able to discharge some state taxes through a bankruptcy case. However, some state taxes absolutely cannot be discharged through bankruptcy. Talk with your bankruptcy attorney for details.
Note that when you file for bankruptcy, the courts issue a temporary stay that prevents creditors (including the ALDOR) from taking collection actions against you. If you receive a Final Notice Before Seizure from the ALDOR while you are in the midst of a pending bankruptcy case, call the Collection Services Division at (334) 353-8096 as soon as possible. Make sure to have the details of your bankruptcy case nearby.
Tax Collection Enforcement Actions in Alabama
The ALDOR can use a wide range of tactics to collect unpaid state taxes. In many cases, once these collection actions have been started, they can be difficult or impossible to reverse. That is why you should contact the ALDOR and make arrangements on your unpaid tax bill as soon as you can.
If you ignore Alabama state taxes, you may end up facing the following collection actions.
Tax Liens for Unpaid Alabama Taxes
The state of Alabama can file a tax lien in the Office of the Judge of Probate in the county where you live or own property. You will not be able to sell or transfer your property until the lien has been removed.
The ALDOR does not send a record of the lien to the credit reporting agencies, but the lien is public information and the credit reporting agencies have the right to obtain this info from the county courthouse. If the credit bureaus access this information, the lien will appear on your credit report for seven to 10 years, and it can seriously impair your ability to take out loans or access credit.
Tax Levy for Alabama Back Taxes
A tax levy is when the government levies or seizes your assets to cover your unpaid tax liability. In Alabama, the ALDOR uses the following tax levies:
- Wage garnishment — The state can levy up to 25% of your gross wages.
- Bank levy — The state can seize the full amount in your bank account up to the tax bill.
- Garnishments of third-party holdings — The state can seize insurance proceeds, rental income, or other third-party holding property owned by you.
- Tax refund offsets — The state can seize your state tax refunds, and it can use the federal offset program to take your IRS refunds as well.
The state can also use a writ of execution to seize and sell your real or personal property.
Writs of Execution
If you have unpaid taxes in Alabama, the ALDOR can ask the sheriff to auction off your property on the courthouse steps to the highest bidder. For real property, you can redeem your property if you pay the total tax liability, the cost of the sale, and the accrued interest. You cannot redeem personal property.
Tax Penalties Charged
If you file a return late, the late-filing penalty is 10% of the tax due or $50, whichever is higher. If you file but don't pay, the late penalty is 1% of the tax due every month, up to a total penalty of 25%. For instance, if you owe $1,000 and pay a day late, your penalty is $10. The next month you pay late, you incur another penalty for 1% of the balance, and so on until you pay the tax or reach the 25% limit.
For business taxes due monthly or quarterly, the late payment penalty is 10% of the tax due. This penalty applies to sales, gas, motor fuels, tobacco, dog race track fees, and several other business taxes.
Loss of Liquor License
If your business taxes are seriously delinquent, the ALDOR can petition the ABC Board to revoke your liquor license. You will not be allowed to sell liquor until you have paid the tax or made other suitable arrangements with the state.
Notices About Delinquent Taxes in Alabama
When you file a state tax return and don't make a payment, the ALDOR will send you notices about the unpaid taxes. The state will also send notices about taxes it has assessed against you. You should receive a notice about preliminary assessments, written information about how to appeal an assessment, and notices about collection actions the state is going to take against you.
One common notice is the Final Notice Before Seizure. This notice means that the ALDOR has gotten serious about collecting the debt, and it will pursue advanced collection actions if the tax bill is not paid in full within 10 days of the date on the letter.
Statute of Limitation on Tax Debt
Generally, there is a six-year statute of limitations on collecting delinquent taxes in Alabama. However, the statute can vary based on the situation. If you omit more than 25% of your income or if you commit state tax fraud, the state may be able to assess and collect taxes owed for an indefinite period of time.
However, this is a civil statute of limitations. The state has just six years to bring criminal tax fraud charges against you. The clock for that crime starts ticking on the date of the last act related to the attempt to evade.
Get Help Dealing With Alabama Back Taxes
You don't have to deal with Alabama back taxes on your own. Whether you have unfiled state returns, unpaid state taxes, assessments that you want to appeal, or other tax issues, a tax pro can help you. To learn more, contact a tax professional experienced with the ALDOR today.