Resolving Tax Debt: IRS Debt | Tax Resolution | Tax Debt Relief

Though the IRS has the power to garnish your paycheck or place a lien on your property due to your IRS debt, you have the power to stop these actions by electing one of several options.  While paying off the entire amount due is inevitably the most attractive tax resolution option to the IRS, the agency is aware that this is an unrealistic solution for many people.  Some families live paycheck to paycheck and have very little disposable income available to settle their IRS debt.  Others may be on the verge of retirement with little expectation of generating future income.  Individuals with bad credit and massive IRS debt may be considering bankruptcy, while individuals with good credit may have available funds but not enough to pay off their IRS debt.  Many individuals encounter situations such as these and are not sure what to do for tax debt relief.

Please know that your IRS debt situation is not hopeless and that you have several options available to you based on your current and future financial situation.  It is important that you select a competent tax accountant or tax attorney who understands options for tax resolution, allowing you the softest landing when dealing with the IRS.   If you are low-income, you may qualify for free tax representational services at a low-income taxpayer clinic.  Whoever you decide to use, please remember that strategy and planning are also essential when considering one of the following options:

IRS Debt & Running the Statute of Limitations

First, it is critical to know the amount of time the government has to collect your IRS debt, when the statute of limitations will run, and when the statute will be placed on hold.  The IRS has 3 years to audit your tax return and 10 years to collect your IRS debt from the latest date the tax was assessed.  The statute of limitations is extended (or in other words, temporarily stops running) if you submitted an “Offer in Compromise” and are waiting for a decision or if you filed bankruptcy.  The time period for the government to collect your IRS debt continues to run when an “Offer in Compromise” was accepted, an individual was classified as “currently not collectible,” or an “installment agreement” was put in place.

The tax statute of limitations is an option for some individuals who know they are near the end of the statute and there is limited time for the IRS to collect on your IRS debt.  If you are at the beginning of the statute of limitations, then running out the statute is not a realistic option for you.  However, if you are approaching the end of the statute of limitations, are living paycheck to paycheck, and do not have good credit, then your best option is being classified by the IRS as “currently not collectible” for several years.  As long as your financial situation does not change, then you can be classified “currently not collectible” for the remainder of the statute of limitations.  However, if you generate more income in the future, it is highly likely that the IRS will take you out of this status and demand payment of your IRS debt.  At that point, another option will be more suitable for you for tax debt relief.

Tax Resolution: Currently Not Collectible Status

If an individual is living paycheck to paycheck and has very little assets, the IRS may classify the individual as “Currently Not Collectible”.  When examining an individual’s eligibility for this status, the IRS will take into account their current sources of income, expenses, assets, and debts.  If you have no means to pay the IRS debt owed, no disposable income above your necessary living expenses, and have little assets that the IRS can levy, then there is a high probability that the IRS will classify you as “Currently Not Collectible.”  While “Currently Not Collectible” is truly a great option for someone who is barely making ends meet, it is not a very good option if you have good credit as a means of tax resolution.  If you are classified as “currently not collectible”, the IRS will place a lien on your property if they haven’t done so already.  While the lien will be released at the end of the statute of limitations, it will hurt your credit.  Additionally, penalties and interest on the total amount owed will continue to accrue during your status as “currently not collectible.”

Tax Debt Relief: Offer in Compromise

If you are willing to pay off a portion of your IRS debt, the IRS may consider accepting an “Offer in Compromise.”  An “Offer in Compromise” is only accepted if it is the best solution for both the IRS and individual for tax debt relief.   The IRS will consider your ability to pay the IRS debt over the statute of limitations and whether it is worth the time and effort in collecting money from you during this period.  While “Offer in Compromise” is used in several circumstances, such as when there is “doubt as to the liability,” it is mostly commonly used when there is “doubt as to collectability.”  A successful “Offer in Compromise” typically involves a person who the government believes is highly unlikely to ever pay the full amount of IRS debt.

The IRS will take into account several factors when considering this offer for tax resolution.  This includes the amount owed, the age of the taxpayer, the health of the taxpayer, income and expenses of the taxpayer, and the amount of IRS debt the taxpayer is willing to pay.  If the IRS accepts the “Offer in Compromise,” the taxpayer must be in compliance for at least five years.  The application fee for the “Offer in Compromise” is $150 plus 20% of your lump sum cash payment offer or the first installment payment of your periodic payment offer.  If the taxpayer falls out of compliance, the IRS can rescind the offer and the taxpayer will still owe the full amount due minus the amount paid through the “Offer in Compromise.”  While the IRS will cease collection action against you while your offer is being considered, penalties and interest will continue to accrue on your unpaid balance.

Tax Resolution: IRS Installment Agreements

One of the most common options for tax debt is an IRS installment agreement.  An installment agreement is a reasonable option for tax resolution for a taxpayer who has assets and/or income to pay the full amount of IRS debt or part of it over time but cannot pay the amount right away.  A downside to an installment agreement is that penalties and interest will continue to accrue on the amount due.  If you owe $25,000 or less in combined tax, penalties, and interest then you can submit a streamlined installment agreement, allowing you to pay the debt over a sixty-month period without providing any detailed financial information on your situation to the IRS.  However, if you owe more than $25,000, you must complete and send a Collection Information Statement to the IRS to be considered for an installment agreement.

Tax Resolution & Bankruptcy Eligibility

A common myth is that taxes are not dischargeable during bankruptcy as a method of tax resolution.   However, if your current financial situation is poor – you have a significant amount of unpaid debt and poor credit, you may want to look at your bankruptcy eligibility.  Your taxes may be discharged if they meet the following criteria:  1) the taxes are income taxes, 2) you did not commit fraud or willful evasion when filing your tax returns, 3) the IRS debt is at least three years old (the tax return must have been filed at least three years before you filed for bankruptcy), 4) you filed a tax return, and 5) the IRS debt was assessed by the IRS at least 240 days before you filed your bankruptcy petition, or was not assessed at all.

It is important to note that while a bankruptcy may discharge your IRS debt it will not eliminate an IRS tax lien.   If the IRS placed a tax lien on your property prior to filing, then you will have to pay the lien in order to sell the property.    Furthermore, bankruptcy will not be a solution if you already filed a chapter seven bankruptcy within the past 8 years.  The 2005 bankruptcy reform laws requires a debtor to wait eight years before filing another chapter 7 bankruptcy.  Also, you must wait four years for filing a chapter 13 if you decide to file a chapter 7 in order to discharge debts and taxes.

Past Due Tax Returns

Dealing with past due taxes? If you did not file one or more of your past due tax returns, the IRS will file a substitute return for you.  Consequently, the tax assessed is based on this substitute return and in most cases, will be higher than the amount due if you filed yourself.   Once the tax is assessed, the IRS will start the collection process and may place a levy on your wages or bank accounts or file a federal tax lien on your property.  In order to make sure that the debt is accurate, you should file a return to replace the substitute return.  As compared to the substitute return, you return will take advantage of all exemptions, credits, and deductions you are allowed.  Once this return is filed and is accurate, the IRS will most likely adjust your account to reflect the correct figures.

Contact TaxFirm.com today for more information about IRS Debt and Tax Resolution.