For the Arizona Taxpayer With Serious Tax Debt - What Are All Of Your Options?
Honest taxpayers find themselves with loads of tax debt for a number of different reasons including but not limited to:
- Paycheck under-withholding
- Failure to pay tax on withdrawn retirement funds
- Assessed a trust fund penalty related to employment tax
- Failure to pay tax related to business
- Hobby Loss Challenge, Independent Contractor Challenge
No matter what the cause of the tax debt, the question inevitably becomes "what can I do about it, if I can't afford to pay it?"
There are 9 options that are commonly considered in dealing with tax debt, short of fully paying. Some options are used in combination with others and some are more effective than others.
They are as follows:
1. File un-filed tax returns and challenge the IRS substitute returns
Most of my clients have a number of years of un-filed returns. These returns need to created and filed in order to avoid possible jail time of up to one year per return. They should be filed as well because:
- The filing of the returns makes the taxpayer "current" in the IRS records. The taxpayer must be "current" in order to file an offer in compromise, file bankruptcy or negotiation an installment agreement.
- The filing of the returns will often reduce the amount of the outstanding debt. "What?" you ask. How can there be tax debt if no return has been filed? The IRS can file a substitute return based solely on income that has been reported to them from employers and others. These substitute returns are not typically accurate as they don't take into account the taxpayer's entire situation. The filing of the proper return and the challenging of the substitute return will likely reduce the debt.
2. Challenge the tax assessment
If the tax that has been assessed against the taxpayer is incorrect because the law wasn't properly applied to the taxpayers facts, the assessment can be appealed and litigated in various ways. The most common method is the offer in compromise based on a doubt as to the taxpayer's liability not ability to pay. Assessment of a trust fund recovery penalty, a debt related to the denial of a hobby loss, a debt related to the denial of the treatment of an employee as an independent contractor, among other issues can all be appealed and litigated.
3. Calculate and wait for the Statute of Limitations on collection to expire
If the taxpayer is in an installment agreement, on non collectible status or in limbo, the time period that by law provides the IRS ten years from the date of assessment of the tax to collect the tax, continues to tick away.
If the taxpayer has filed bankruptcy, requested a collection due process appeal hearing, filed an offer in compromise or used various other legal options to slow down collections, the time period may have been "tolled" or stopped, and can be difficult to calculate.
Once the statute period runs, the tax debt is gone and the tax lien if it exists, must be released.
4. Negotiate Non Collectible Status
Low income, low asset taxpayers are often able to negotiate an agreement with the IRS that stops collection of the debt. Often, the IRS will agree to this even if the taxpayer has equity in a home. For those under or unemployed, this can be a huge relief.
Many whose income and asset situation won't change, stay on non collectible status until the statute period on collection runs out.
5. Negotiate Installment Agreement
The IRS will almost always allow the taxpayer to make payments monthly on the debt. The taxpayer must first file all required tax returns. They then must fully disclose all assets, debts and income.
The IRS will want the difference each month between the average income and an expense budget that is partially imposed by them. This area provides a number of planning opportunities.
The payments continue until the taxpayer's income or budget change substantially, the statute of limitations period runs out, or the taxpayer switches to another option like bankruptcy.
6. Offer in Compromise
The offer in compromise is the initial goal of most taxpayers with serious tax debt. It allows for the substantial reduction in the amount of the debt and a settlement in full. It also allows for the taxpayer to challenge the underlying calculation and assessment of the tax. Upon acceptance and completion of the offer, all liens are released.
The problem with the Offer program based on a doubt as to the ability of the taxpayer to pay all of the debt, is that most income earners don't meet the strict criteria and/or can't weather the difficult process to get there. For most taxpayers another option is usually better.
7. Penalty Abatement Request
The IRS will forgive a penalty that has been added to the underlying tax, but not usually without a fight. The first step in obtaining the abatement or forgiveness of the penalty is to have a "reasonable cause" for the act that cause the penalty. A reasonable cause for the failure to file on time, failure to pay on time etc.
A reasonable cause can be almost anything, but it must make a lot of sense in order to stand a chance. The burden of proving the "reasonable cause" is on the taxpayer.
8. Tax - Motivated Bankruptcy
I am of the opinion that most taxpayers don't know that income taxes and some other tax related debts can be wiped out in bankruptcy. For income tax, the rules regarding this, appear to fairly simple at first glance:
- 3 years must have passed since the date the return for the underlying debt was due
- 240 days must have passed since the tax was assessed
- 2 years must have passed since the filing of the return
- no fraud, misrepresentation etc.
Unfortunately, these rules are fraught with hidden "traps for the unwary" taxpayer. What actually constitutes a return, whether the return was filed properly, extension, audits, previous offers in compromise and bankruptcies all contribute to create these traps.
Only an experienced tax -motivated bankruptcy attorney should be consulted to determine whether a tax debt meets the basic criteria for dischargeability in bankruptcy.
9. Innocent spouse claim
The law allows the spouse of a taxpayer who has caused the tax debt to ask for the debt to be forgiven as to him or her. The guidelines are stringent but are commonly met.
If you are an Arizona taxpayer who has been assessed a tax you feel is incorrect, or who has a tax debt you don't know how to handle, call my office and ask for me Michael Anderson at 480-507-5985. I will talk to you for free about your problem over the phone.
