IRS Debt: The stuff of sleepless nights and serious regrets.
If you have a serious tax debt ,you may have some regrets and worse…you may feel as if there won’t be a viable solution.
I can tell you though that for many people with serious tax debt problems, there is hope. Many of my clients can attest that if you are willing to create a plan, and combine it with some patience and hard work, you can substantially reduce or even eliminate the debt.
The following legal methods are the most common ways we do it.
1. IRS Statute of Limitations
The time period the IRS has to collect is limited to ten years by 26 U.S.C Section 6502. The 10 year date is important, and we often use a payment plan or non collectible status to get to it.
Here is an example:
My client had a tax debt that had grown to $100,000.00 over the course of 7 years. He had been in and out of payment plans with the IRS. His tax debt had reached an age that it was dischargeable in bankruptcy but he didn’t want to file a bankruptcy. He would have “qualified” for an offer in compromise with the IRS as well.
However, he was going to retire and his income was going to drop in half. That reduction in income allowed him to negotiate a new and very small payment plan with the IRS of $50.00 per month. As his new income was not going to increase and his overall situation was going to stay substantially the same, he decided to finalize the payment plan negotiation and wait for 3 years.
At the end of the 3-year waiting period, he had paid approximately, $1700.00 toward the $100,000.00 debt, the remainder was wiped away and the IRS lien was released.
The above scenario is common, and much more common than you would think. In many cases it is wiser to “lay low” and let the clock run, than to take a more of a risk in terms of cost and file an IRS offer in compromise or a bankruptcy that will stop the statute of limitations clock from ticking away.
2. Challenge the Amount of the Tax Debt
The IRS assesses incorrect tax debts all the time. These incorrect assessments are typically the result of an IRS audit during which the taxpayer wasn’t able to prove the case or the creation of an incorrect return by the IRS because the original return was never filed.
Here are some options:
Appeal the Audit Result
IRS Audits can be appealed and they can be appealed all the way to the US Tax Court if the rules are followed. If you know that the IRS got it wrong, appealing the case may be the best option.
Appealing the IRS Substitute Tax Return
If the IRS files a return for you, it is usually incorrect, and often results in a debt that is larger than it should be. The IRS uses this incorrect debt to engage in collection activity.
These incorrect returns can be appealed as well. Most people don’t file the appeal on time, and in those cases a process called an “Audit Reconsideration” is used. The IRS will usually accept a correct return during the Audit Reconsideration process, and replace the incorrect return reducing or even eliminating the debt in some cases.
Trust Fund Recovery Assessment – It can be challenged
If you are signing checks, or making decisions about which bills should be paid for a business you can be held personally responsible for the trust fund portion of any employment tax the business should be withholding. If the IRS issues this assessment, you must consider appealing the decision or you will have a debt that is not dischargeable in bankruptcy and that is typically very large.
Innocent Spouse Relief – If you didn’t know you shouldn’t have to pay
Sometimes the spouse will hide some things from you like the fact that he or she didn’t disclose all of the income earned at the business on your joint return. There is often egal redress for the innocent spouse in these types of cases.
3. IRS Offer in Compromise
The US Tax Code at 26 U.S.C Section 7122 lays out the law regarding the IRS Offer in Compromise. The IRS Offer in Compromise is just the Government’s program for those it believes have little ability to pay all if the tax debt over a period of time. The amount the IRS uses to determine whether the debt can be paid or not, is called the “IRS reasonable collection potential”.
In the past, most IRS Offers in Compromise failed and they did primarily because the formula used to determine the reasonable collection potential was weighted in the IRS’ favor.
In May of 2012, the IRS changed the rules. We think that these rule changes will increase the number of successful Offers in Compromise. Anyone with serious tax debt should have an experience tax resolution attorney analyze whether an offer will make sense.
Many aren’t aware that bankruptcy can be a powerful option in dealing with IRS debt. Certain tax debts can be reduced or even eliminated in bankruptcy. bankruptcy.
The most important thing to understand about tax debt and bankruptcy is that the bankruptcy code trumps the IRS. If an offer in compromise doesn’t make sense, the taxpayer will often end up making unreasonable payments to the IRS on the debt over a long period of time. A bankruptcy must be considered in those instances.
An installment agreement is often used prior to the filing of a bankruptcy primarily in order to ensure that the date requirements for discharge of the tax debt are met. The Bankruptcy Code requires that the tax is based on a return that was due at least 3 years prior to the bankruptcy filing and that the return was filed by the taxpayer at least 2 years prior.
We have used bankruptcy to help our clients eliminate or substantially reduce millions of dollars in tax debt. For many, it will be the best option in the end.
5. Penalty Abatement
There are upwards of 140 IRS penalties and each one of them has an exception based on “good faith”.
The most common penalties we see are the failure to file and the failure to pay penalties. These can be removed even though you filed the return late and paid the balance late, if you acted in good faith and there was some reasonable basis for the failure.
Removal of these penalties can help in cases where the taxpayer will end up paying most of the debt in an IRS payment plan.
If the debt will be reduced in an IRS offer in compromise, or in a bankruptcy, the amount of the penalty is usually irrelevant and no request for penalty abatement is necessary.