Iowa Back Taxes: Overview of Tax Resolution Options and Collections
The Iowa Department of Revenue collects personal and business taxes for the State of Iowa. If you don't file or pay your state taxes, you can face severe consequences, including wage garnishments, property levies, bank account seizures, and even the loss of your driver's license, professional licenses, or hunting licenses.
To help you out, this guide provides an overview of some possible tax relief options with the Iowa Department of Revenue (DOR). Then, it goes over what can happen if you don't file or pay your Iowa state taxes. Finally, it gives you advice on how to find an Iowa tax pro.
Iowa Tax Resolution Options
The Iowa Department of Revenue is serious about unpaid taxes. But the state is reasonable and willing to work with taxpayers who want to take care of their unpaid taxes. To protect yourself, your business, and your assets, you should attempt to work out an arrangement with the Iowa DOR as soon as possible. Here is an overview of the tax resolution options in Iowa.
Payment Plan for Iowa Back Taxes
The DOR may allow you to set up a payment agreement if you cannot afford to pay your individual and corporate income tax in a lump sum. In Iowa, you can take up to 36 months to pay off your tax bill, but you must pay at least $10 per month. There are different rules for setting up payment plans on Iowa sales, use, and withholding taxes. An Iowa tax pro can help you apply for a payment plan for your business or personal taxes.
Offer in Compromise — Settle Iowa Taxes for Less Than You Owe
The Iowa Department of Revenue may be willing to let you settle your tax bill for less than you owe through the offer in compromise program. With this program, you offer how much you can afford to pay. Then, the DOR reviews your financial situation to ensure the offer is fair to the state.
When you apply for an offer in compromise in Iowa, you must include certified funds for the full amount of the offer with your application. You can get a refund if the state doesn't accept your offer. You can read more about the Offer in Compromise program here.
Innocent Spouse Relief in Iowa
Generally, when you file a tax return as married filing jointly, you and your spouse share liability for the taxes owed. However, the IRS and the Iowa DOR both offer relief to people whose spouses should be held exclusively responsible for the tax debt.
Usually, this applies in situations where one spouse underreports their income without the other spouse's knowledge, leading to an unexpected tax liability. If you want to obtain innocent spouse relief on an Iowa tax bill, you first need to apply for innocent spouse relief from the IRS.
You would want to work with a tax professional and file Form 8857 (Request for Innocent Spouse Relief). If the IRS approves your request, send the Final Determination letter to the Iowa DOR. Then, in most cases, Iowa will also extend innocent spouse relief to you. The State of Iowa generally will not provide you with innocent spouse relief if the IRS denies your request.
The Iowa DOR does not advertise a hardship program for people who cannot afford to pay their taxes. If you are experiencing financial hardship, you should consider the state's offer-in-compromise program. In some cases, you may also be able to eliminate some taxes through bankruptcy, but this is a complicated process and not all taxes are eligible.
Penalty Abatement from the Iowa Department of Revenue
In rare cases, the Iowa Department of Revenue will waive penalties on your account. The state will not waive willful failure to file penalties, but if you can prove reasonable cause, the DOR may be willing to waive late filing or late payment penalties. To request a penalty waiver in Iowa, you need to file Form 78-629 (Penalty Waiver Request).
When filling out this form, you note the type of tax, your contact information, and the reason you believe the IA DOR should waive the penalties. You can only request penalty abatement for the following reasons:
- You paid 90% of the tax due on time.
- You have filed and paid all of your tax obligations for the last 36 months. For instance, if you have filed all of your sales tax returns on time for the last three years and then you filed one late, you can use this reason. This option is not available for income tax, corporate tax, franchise tax, or annual sales or withholding filers.
- You, an immediate family member, or a responsible party has died. For instance, this reason might apply if the responsible person in your corporation dies and you file your corporate return late as a result.
- You, an immediate family member, or a responsible party become seriously ill or are hospitalized. For instance, if you file your personal return late because you were in the hospital on the due date, you can use this reason.
- Your records were destroyed in a fire, flood, or other act of nature.
- You incurred late fees due to receiving incorrect written advice from the Iowa Department of Revenue, Department of Transportation, country treasurer, or the IRS.
- You relied on the results of a previous audit when filing your tax return.
- You mailed the return or payment on time but sent it to the wrong state agency or the IRS.
- The wrong permit holder paid the tax on time, and you reached out before the DOR contacted you.
- You realized that you forgot to file when the DOR sent you a self-audit request.
- You filed an amended return and paid all of the tax due before the DOR contacted you. Note that self-audit forms do not constitute DOR contact in this situation.
- Your tax liability changed due to a federal audit, and you filed an amended Iowa state return and paid the new tax liability within 180 days of the federal audit.
- You are required to pay your Iowa taxes by electronic funds transfer, and you didn't have the funds for reasons beyond your control.
- You didn't file or pay an Iowa inheritance return because you decided to disclaim the property from the estate and you filed the inheritance return within nine months of the date of death or 60 days from the delivery or filing date of the disclaimer.
Unless you apply for a penalty waiver based on the first two reasons, you must provide proof of your claim. For instance, if you are requesting penalty relief because an immediate family member died, you should include the death certificate when you make your penalty abatement request.
The Iowa DOR Appeals Process
If you disagree with an Iowa tax assessment, you have the right to appeal. You must appeal in writing within 60 days of receiving the notice. If you miss the appeal deadline, you can pay the tax bill. Then, you can request a refund. If the Iowa DOR rejects your refund request, you have 60 days to appeal the denial.
To request an appeal, you should file Form 76-500 (Appeal of Department Action). Alternatively, you can appeal online if the appeal is related to sales, use, E911, withholding, motor fuel, hotel/motel, local option sales, automobile rental, or water service excise tax. The state does not offer online appeals for individual income tax.
If you miss the appeal's window because the DOR failed to correctly mail your notice of assessment or refund denial, you can request Reinstatement. To do so, file Form 76-504 (Application for reinstatement). You must submit this form within 30 days from the date your appeal was dismissed.
Amnesty Program for Iowa Taxes
Amnesty programs are extremely rare. As of 2022, Iowa has not offered tax amnesty to its citizens for over 15 years. The last time the state offered amnesty was for two months in 2007. During this brief time period, taxpayers could submit unfiled returns without incurring penalties, and they only had to pay half the interest.
Iowa Department of Revenue Collection Actions
If you have unpaid Iowa taxes, the DOR will send you notices and may call you. The state can also take a number of involuntary collection actions against you. This may include liens, levies, refusing to renew licenses and more. Keep reading for a look at how Iowa collects unpaid taxes.
The State of Iowa has the right to file liens against taxpayers with delinquent tax bills. A tax lien secures the state's interest in your tax debt. It attaches to your real and personal property such as real estate, vehicles, and boats. If you sell any of your assets while there is an Iowa tax lien against you, the state has the right to the proceeds from the sale.
Liens are public records. They make it very difficult to sell or take loans against your assets. They can also appear on your credit report for years. In Iowa, tax liens last for 10 years. The state can also extend them for an indefinite number of 10-year periods.
Property Levies for Unpaid Iowa taxes
If you have unpaid taxes, the Iowa DOR can seize your bank accounts, real estate, vehicles, and other real and personal assets. In most cases, you must pay the balance in full to get the levy released. But the State of Iowa may also release the levy if you set up a payment arrangement or if releasing the levy will help the DOR collect the tax bill.
To give you an example, imagine that the DOR plans to levy your property. But if the state releases the levy, you can take a loan against the asset to pay off the tax bill. In this case, you can contact the state to release the levy. This allows you to obtain the loan so you can pay your tax bill.
Wage Garnishments for Iowa Back Taxes
The Iowa DOR can also garnish your wages for unpaid taxes. The department can file an administrative wage assignment that requires your employer to withhold up to 100% of your disposable income.
The IA DOR must send you a notice 20 days before sending the garnishment order to your employer. Once your employer receives the letter, they must start garnishing your wages within 10 to 20 days. As of 2022, your employer can deduct up to $25 from each check to cover the cost of handling the garnishment. They can deduct even more if they can prove that the garnishment costs them more.
Tax Refund and Vendor Payment Levies
In Iowa, the state can also seize tax refunds or vendor payments if you have unpaid taxes. The State of Iowa's Offset Program allows the DOR to seize any payments owed to you by a state agency and then apply the money to your tax liability. The offset program also takes casino jackpots over a certain threshold and applies them to your tax debt.
Tax Penalties in Iowa
The Iowa DOR charges several different penalties for people who don't file or pay their state taxes. If you don't file your return on time, the penalty is 10% of the tax due. The penalty is 5% of the tax due if you pay late or have an audit or examination deficiency.
The state does not stack the late payment and late return penalty. To give you an example, imagine that your Iowa state tax liability is $10,000 and you don't file a return or make a payment. Your account will incur a $1,000 failure-to-file penalty. The state assesses these penalties monthly so you will incur this penalty every month until you file or pay.
Now, imagine that you file the return, but you still don't make the payment. At this point, you will only be responsible for the late payment penalty. Based on your $10,000 tax liability, the late payment penalty will be $500.
In other words, your penalty will be 5% or 10%, depending on the situation. It will not be 15%. However, because the penalties are assessed monthly, the total can get much higher than 15%. It's just not going to be 15% per month.
The audit penalty applies when an audit or examination reveals that you underreported your tax due. For instance, imagine an audit reveals that you owe $2,000 in additional tax. At this point, you will incur a $100 audit penalty.
The Iowa DOR also charges a 75% penalty for willful failure to file a return. The state will assess this penalty if the DOR believes that you have willfully avoided filing a tax return. Because this penalty is so high, you should seek help from a tax professional if the DOR assesses it against you. For instance, if you owe $10,000 in Iowa state taxes, this penalty is $7500.
Interest on Iowa Back Taxes
Interest accrues on unpaid Iowa taxes. The interest starts to accrue the very first day you are late. As of 2022, the Iowa Department of Revenue assesses interest at a rate of 0.4% per month. This equates to an annual rate of 4.8%.
The rate assesses the first day you are late. For instance, if you owe $1,000 and you're a day late, $4 in interest will be added to your balance. This is on top of any penalties that you incur.
License Suspensions or Denials
The IA DOR can also send a Certificate of Noncompliance to the state's licensing authorities to alert them about your unpaid tax liability. Then, the licensing body can suspend, revoke, or deny your license.
This can apply to professional, occupational, recreational, and business licenses. In other words, you can lose your driver's license, vehicle registration, hunting licenses, and business licenses if you don't pay your Iowa tax bill.
Before issuing sanctions against you, the department will notify you. You need to set up a payment plan to stop the license sanction. Alternatively, you can schedule a conference to challenge the sanctions.
Iowa State Tax Collection Notices
The Iowa Department of Revenue will send you billing notices and tax assessments if you owe personal or business taxes to the state. The state will also send you notices if it plans to file a tax lien, garnish your wages, levy your bank account or other assets, or take other collection actions against you.
Jeopardy Tax Assessments in Iowa
Generally, the IA DOR must notify you in a timely manner before taking involuntary collection actions against you. However, this rule does not apply if the state believes its tax collection is in jeopardy. A jeopardy assessment applies in cases where the state believes that it will not be able to collect the tax.
For instance, if the state has reason to believe that you are going to flee the country or sell all your assets before it issues a lien, it has the right to collect taxes in a manner that is faster than usual.
Iowa Statute of Limitations on Tax Collection
Generally, the state must assess tax within three years of the date the return was filed. However, if no return was filed or if a fraudulent return was filed, the state has unlimited time to assess the tax. In this case, there is no statute of limitations on the tax assessment.
The state can take up to 10 years to collect tax debt once it has been assessed. However, in some cases, the time limit may be longer. As indicated above, the state can refile liens every ten years. This means that a state tax lien can exist against your assets for decades if you have unpaid Iowa taxes.
Get Help With Iowa State Taxes
If you have unpaid taxes in Iowa, you need to get help from an Iowa tax pro who has experience dealing with the Iowa Department of Revenue. Every state has its own collection rules and processes. To protect yourself and your assets, you need to work with a professional who understands Iowa's rules inside and out.
This requires a local professional, not a big company that doesn't really know what goes on in Iowa. When you work with a local Iowa tax professional, you can also ensure that you will get the customized, individualized attention that your situation requires.
How do you find a local Iowa tax pro? Using TaxCure, you can search for Iowa tax pros, and you can filter your results based on experience with particular state tax issues. To start, click on "Find a Local Tax Pro"