So How Can I Solve My Tax Debt Problems?
Dealing with past due taxes is never pleasant. But if you ignore the Internal Revenue Service notices, you are only postponing the inevitable and potentially making the problem worse. Penalties and interest continue to accrue on the unpaid balance and your paycheck could be subject to a levy (where your employer is required to turn over a substantial portion of it to the IRS). Your other assets such as your home and/or car could potentially be subject to a federal tax lien, which may also show up on your personal credit report. You may check your bank account balance one day and find a significant portion, or all of it, gone to pay the tax debt. But all of the painful consequences associated with federal tax debt can be avoided if you confront the problem using one of several methods permitted by the Internal Revenue Service. Here are the legal ways you can deal with past due taxes when you are not prepared to pay them off all at once:
Installment Agreement
This is the most common method for handling unpaid tax debt and the easiest way to halt any collection action from the IRS. After determining the total amount of taxes, penalties and interest owed, an affordable monthly payment is proposed. Any tax refunds you may receive in future years are also applied toward the outstanding tax debt.
If you owe less than $ 10,000 and can pay off the debt in three years or less, the process for securing an installment agreement is an automated one and you do not need to turn over any information about your personal assets or income.
If you owe less than $ 50,000 and can retire the debt in six years or less, additional paperwork is required but it is a streamlined process. The IRS will need little or no information about your assets or income.
If you owe more than $ 50,000, the procedure for securing an installment agreement is more complex. To grant you an agreement the IRS will require information about your assets and income. Retaining a professional is highly recommended in this circumstance. Once an installment agreement is in place, interest will continue to accrue, but penalties will be reduced and the IRS will no longer attempt to impose any levies on your paycheck and/or your liens on your assets, as long as you make your monthly payments on time.
Partial Payment Installment Agreement
This is similar to a traditional installment agreement. However, given your income and living expenses (as permitted by the IRS), if you are unable to pay off the outstanding tax debt within the ten-year statute of limitations you will only be required to make the monthly payments you can afford. Based on your income and expenses the IRS will determine how much you can afford each month. You make monthly payments until the statute of limitations on the tax debt expire. Any future tax refunds are applied toward the debt as well. When the statute of limitations expires, you will no longer be required to make the monthly payments and are no longer subject to any remaining balance of the tax debt.
Currently Not Collectible Status
If your current income is only sufficient to meet your regular, IRS-permitted living expenses, you may qualify to be placed in Currently Not Collectible status. You will be required to disclose your total assets and demonstrate that your level of income is only sufficient (or insufficient) to meet your current living expenses. Once it is determined that you are presently unable to pay your past-due tax obligations, the IRS will halt any further collection activity provided you continue to file your annual returns on time. The IRS will review your income each year when you file your annual returns and resume collection activity if your income shows a significant change.
Listed below are additional, less common methods for dealing with tax debt:
Temporary Lien Release
Do you own real estate with considerable equity that you could borrow against to pay off your tax debt, but are unable to do so because the IRS has imposed a lien on the property? The IRS has a formal procedure whereby they will agree to temporarily remove their lien(s) on your property allowing you to take out a loan to repay the tax debt. While it is true that you are replacing one kind of debt with another, this allows you to eliminate your tax debt with a loan that may have a more favorable interest rate than the IRS rate (and interest that is tax deductible). It will also most likely improve your credit report, once the IRS lien(s) are removed. You will also no longer pay IRS penalties.
Filing Bankruptcy
Filing personal bankruptcy may allow you to discharge your federal tax debt provided the debt is at least three years old and certain other criteria are met. This may be a viable option if you also have considerable other types of debt that you are also seeking to discharge. CAJ Tax Solutions cannot assist you in filing bankruptcy; however, we will be more than happy to refer you to a qualified bankruptcy lawyer to guide you through the complex process.
Offer in Compromise
As I have discussed on another part of this website, while it is possible to discharge past due tax debt for less than the amount owed, to qualify there are extremely strict criteria that must be met concerning your income and assets. The overwhelming majority (at least 75%) of proposed Offers in Compromise are rejected because the taxpayers are deemed to have enough excess income and/or assets to repay the tax debt within their lifetime and the IRS believes it has no incentive to accept any less than the total amount owed. Also, applying for an Offer in Compromise can be a long and complex process that requires disclosing all of your financial information to the Internal Revenue Service. I will not file an Offer in Compromise for you (nor accept any fee for doing so) if I have reason to believe you will not qualify for one, as is usually the case.