Colorado: Tax Options & Consequences of Back Taxes
The Colorado Department of Revenue collects personal income tax and business taxes in Colorado. If you don't file your return or pay your taxes, the DOR will issue a bill and start collection action on your account.
The CO DOR may also refer your bill to a third-party collection agency. As of 2021, BC Services, based in Longmont, Colorado, and Integral Recoveries, Inc, based in Englewood, Colorado, are the collection agencies used by the DOR. If the Colorado DOR places your delinquent taxes with these agencies, you must work with them to take care of your outstanding liability.
Here's an overview of what to expect if you owe back taxes in Colorado.
Resolution Options for Colorado Back Taxes
The Colorado DOR has the following options available to people and businesses who cannot pay their taxes. You must apply and get approved for these programs. There is no automatic relief on back taxes.
Individuals and businesses may qualify to pay back taxes on a payment plan. Individuals can apply online, but businesses need to speak with a compliance agent.
You must pay at least $25 per month, and the amount of time you can take to pay off the liability varies. While you're on a payment plan, interest will continue to accrue on your balance, and the state of Colorado will keep your state and federal tax refunds and apply them to your balance.
Offer in Compromise
Colorado's offer-in-compromise program allows you to pay off your tax bill for less than you owe. To qualify for an offer-in-compromise in Colorado, you must first apply and be accepted for an offer-in-compromise from the IRS for the same tax year.
You also must meet other strict criteria and provide the state with detailed information about your financial situation. In most cases, the IRS and the Colorado DOR will only accept an offer if it represents the most money the agencies are likely to be able to collect from you.
Innocent Spouse Relief
Both taxpayers are responsible for the tax when you file as married filing jointly. But in rare cases, you may qualify for innocent spouse relief if you can prove that you should not be liable.
To obtain innocent spouse relief in Colorado, you must first obtain relief on your federal tax bill. Use Form 8857 to request innocent spouse relief from the IRS. If the IRS accepts your request, the Colorado DOR will also accept your request, but you need to send in paperwork. The process is not automatic.
To apply for innocent spouse relief in Colorado, send a request and a copy of your determination from the IRS to the following address:
Colorado Department of Revenue
Innocent Spouse Desk, Room 240
PO Box 17087
Denver, CO 80217-0087
The Colorado Department of Revenue does not offer hardship status to delinquent taxpayers, but if you cannot afford to pay your tax bill, you have options. As explained above, you may qualify to reduce your tax bill through the offer in the compromise program.
Alternatively, if you apply for a payment plan and cannot afford the payments, you can request lower payments. You just need to submit DR6596 (Statement of Income and Expenses). This form requires detailed information about your income, assets, and living expenses. If you can prove that you cannot afford to pay much, the DOR may be willing to accept very low payments on your account.
Colorado does not advertise a penalty abatement program. But a tax professional may be able to help you contact the state and request to have the penalties removed from your account.
If the Colorado Department of Revenue makes changes to your tax return, you will receive a Notice of Deficiency or Rejection of Refund Claim. This letter will explain the protest process and the documents you need to provide.
To file a protest, you must request a hearing with the Executive Director within 30 days of the mailing date of the notice. If preferred, you can request to file a written brief instead of having a trial.
To protest Colorado taxes, write a letter with the following details:
- Your name and address.
- The source code from your letter.
- Tax amount, tax type, and tax period.
- A list of the elements you disagree with.
- If you want to file a brief instead of having a hearing.
- Your signature.
Then, you can mail your letter to the Colorado Department of Revenue or submit it through Revenue Online. Make sure to include a copy of the notice you received.
Enforcement Actions for Colorado Back Taxes
If you owe back taxes, the DOR can use a range of different enforcement actions. Here are some of the collection actions that may occur when you have delinquent taxes in Colorado.
The Colorado DOR can file a judgment lien against your assets if you owe back taxes. A tax lien is the state's legal claim to your assets. It can attach to all your assets (real estate, vehicles, etc.), and you cannot sell the asset unless you pay the tax bill first.
The Colorado DOR will send a Notice of Intent to Issue Judgment/Lien to your last known address. To stop the lien, you must pay your tax bill within ten days of the date of the notice.
You must pay certified funds such as cashier's checks or money orders. To ensure your payment is credited in time, you should not mail it. Once a lien is in place, it can be challenging to remove.
A tax levy is when the Colorado DOR seizes your assets to cover your unpaid taxes. The state may seize bank accounts, property, and wages. In Colorado, a wage garnishment tends to be the most common type of levy.
The DOR will send a letter notifying you that they will garnish your wages. You have 30 days to pay your tax bill in full or make arrangements to resolve the liability. If you have received this letter, you need to contact a tax pro or reach out directly to the DOR.
Once the wage garnishment is in place, the state will not remove it until you have paid your tax liability in full. You cannot set up a payment plan at this point. Additionally, if you make a partial payment, it will not stop or reduce the garnishment.
Typically, wage garnishments are 25% of your disposable pay. Disposable pay is your pay after Social Security, Medicare, and taxes. For instance, if you make $1000 per week after taxes, the state will typically take $250 every week.
If your wage garnishment is causing financial hardship, you can request to reduce the garnishment. You must send the following to the state:
- Form 6596 (Statement of Income and Expenses)
- Form 6597 (Waiver of the Statute of Limitations)
- Copies of your most recent paycheck stubs
- Your spouse's paycheck stubs, if applicable
- Colorado income tax returns
- The fax number for the payroll department of your employer
With the first form, you provide the state with detailed information about your financial situation. With Form 6597, you agree to give the state more time to collect the tax. You may want to consult with a Colorado tax professional before submitting either of these forms.
Tax Penalties Charged
If you do not file your income tax return or make your payment on time, the Colorado DOR will assess a penalty of 5.5% of the tax due each month or partial month, up to a total of 12%. If you owe less than $100, your penalty is $5 per month.
For example, if you owe $1,000, the penalty for the first month will be $55. This penalty applies the very first day you are late. If you don't pay by the next month, you'll incur another $55 penalty, but your total penalty will not exceed $120.
In Colorado, the penalties for paying sales tax, marijuana sales tax, cigarette tax, and other business taxes range from 10 to 30% of the unpaid tax. On top of that, the DOR also charges a flat penalty for failure to file certain business tax returns.
Common Colorado Tax Notices
The Colorado DOR sends many different notices to individual and business taxpayers. Here are some of the state's most common notices, along with a brief description:
- Notice of Deficiency — The DOR has made changes to your tax return, and you now owe a tax bill.
- Rejection of Refund Claim — The state had made adjustments to your return that prevented you from getting a refund.
- Final Notice of Determination and Demand for Payment — Your tax liability is final. The state is demanding payment.
- Statement of Account — The DOR generally sends a Statement of Account with the above notice. It shows how much you owe, payments made, and your account status. If you are in a payment plan, you will still receive the Demand for Payment, and the Statement of Account will show which of your tax liability is in the payment plan.
- Notice of Intent to Issue Garnishment — This is a courtesy letter the DOR sends before notifying your employer of the garnishment. You have 30 days to make arrangements or pay the tax owed.
- Intent to Issue Judgment/Lien — You have ten days to pay your tax bill, or a lien will apply to your assets when you receive this letter.
The Colorado DOR issues letters when you miss filing deadlines, don't file tax returns or have unpaid taxes. It also sends notices if it adjusts your return.
Statute of Limitations on Colorado Taxes
The statute of limitations on Colorado taxes is six years from the latter of the date on which the tax was due, or the return was filed. If the failure to collect the tax was based on an error or omission from the government, the statute of limitations is just two years. In cases of tax fraud, there is no statute of limitations.
Get Help With Colorado Back Taxes
Dealing with unfiled returns and back taxes in Colorado can be confusing and stressful. To ensure you get the best result for your situation, you need to work with a tax pro who's experienced with the Colorado DOR. To learn more, contact a Colorado tax pro today.