Facing IRS debt can be overwhelming, yet numerous strategies exist to manage and potentially lessen your tax obligations. This article delves into various avenues, from negotiating payment terms to exploring bankruptcy, and demystifies IRS policies to help you navigate the resolution of IRS debt.
Offer in Compromise
One of the primary methods to manage IRS debt is through negotiation. The Offer in Compromise (OIC) program allows taxpayers to settle their debts for less than the full amount if full payment would cause financial hardship. This option requires a thorough demonstration of your financial situation and is ideal for those who genuinely cannot meet their tax obligations. While there are many companies advertising new programs and “initiatives,” these are just clever names for the OIC program. In my opinion, an accountant or tax lawyer can serve you well and may cost less than some of these tax resolution companies.
Keep in mind, if you don’t qualify for an Offer in Compromise, an installment with the IRS can halt penalties and provide a way to pay off debt over time, easing the immediate financial burden.
Tax Penalty and Interest Relief
Penalty Abatement for Reasonable Cause.
The IRS may waive penalties for taxpayers who can demonstrate a reasonable cause for their inability to comply with tax obligations. Reasonable cause might include serious illness, unavoidable absence, or natural disasters. Other acceptable reasons could involve issues with tax records, lack of funds despite exercising care, or receiving incorrect advice from a competent tax advisor. The key is to provide a thorough explanation backed by documentation. The IRS evaluates each case on its own merits, considering the taxpayer's history of compliance and the promptness of their actions once the issue was identified.
First-Time Penalty Abatement (FTA) Policy.
This policy is a relief option for taxpayers with a clean compliance history. If you have no prior penalties for the three tax years preceding the year with the penalty and have either paid or arranged to pay any due taxes, you may be eligible. This policy recognizes that even conscientious taxpayers can make an error. The FTA can be particularly beneficial as it's a straightforward way to reduce the burden for first-time issues.
"Currently Not Collectible" Status
"Currently Not Collectible" (CNC) status is an IRS provision offering temporary relief to taxpayers who are unable to pay their tax debts due to financial hardship. This status halts active collection efforts, providing breathing room for those facing severe economic constraints.
To qualify for CNC status, taxpayers must demonstrate that paying their tax debt would prevent them from meeting basic living expenses. The IRS assesses this based on income, expenses, and asset equity. Essential expenses include housing, food, utilities, health care, transportation, and certain other necessities. The goal is to evaluate whether any income remaining after these expenses is insufficient to cover the tax debt.
Applying for CNC status involves a detailed financial analysis. Taxpayers must submit Form 433-F, Collection Information Statement, providing comprehensive information about their finances, including income sources, living expenses, assets, and liabilities. It's crucial to provide accurate and complete information to avoid delays or denials.
While CNC status offers temporary relief from collections, it's not a permanent solution. Interest and penalties continue to accrue on the unpaid tax debt, potentially increasing the total amount owed over time. The IRS periodically reviews the taxpayer’s financial situation, typically every one to two years, to determine if their ability to pay has improved.
Innocent Spouse Relief
Innocent Spouse Relief provides protection to individuals who find themselves facing tax liabilities due to the actions or omissions of their spouse or former spouse. This relief is crucial for those who were unaware of inaccuracies in joint tax returns.
To qualify, you must have filed a joint return which understated taxes due to erroneous items solely attributable to your spouse. Erroneous items can include unreported income or incorrect deductions or credits. Importantly, you must prove that at the time of signing the return, you didn't know, and had no reason to know, about these inaccuracies. The IRS also considers whether it would be unfair to hold you responsible for the tax.
There are three types of relief under this category: traditional Innocent Spouse Relief, Separation of Liability Relief, and Equitable Relief. Each type has specific criteria and caters to different situations of unfair tax burden.
Expiration of IRS Debt
Typically, IRS debt expires 10 years from the assessment date, known as the Collection Statute Expiration Date. This time limit means the IRS has a decade to collect the owed taxes, after which they generally write off the debt. However, certain actions like filing for bankruptcy or submitting an OIC can extend this period.
Not many people understand that most tax debts are dischargeable in bankruptcy. Generally, income taxes can be discharged if the taxes are at least three years old and the tax return was filed at least two years ago.
In Chapter 7 bankruptcy, qualifying tax debts can be wiped out completely. Chapter 13 bankruptcy, on the other hand, involves a repayment plan where tax debts can be included and paid over the plan period, often without additional penalties and interest.
Alternative Ways to Pay Off IRS Debt Quickly
Securing a personal or home equity loan could offer a lower interest rate compared to the IRS’s charges. This strategy consolidates your tax debt and can reduce overall payments. However, it's essential to understand the implications of such loans on your financial health. In you are pulling equity out of your home, you are essential making an unsecured tax debt secured by your home. You should try this only after understanding your eligibility for all of the relief detailed above.
There are plentiful avenues to tackle IRS debt. Whether through negotiation, bankruptcy, or other strategies, various paths exist to manage and resolve tax liabilities. Consulting with a tax professional, such as an accountant or a lawyer, can illuminate your rights and options. At DebtStoppers, our attorneys are always happy to discuss these options with you at no charge.