Get Rid of Tax Debt

A common question asked by those who fall behind on taxes is, “How to get rid of tax debt without filing for bankruptcy?”  Our legal professionals at RJS LAW help answer this question often and this blog post will discuss some of the different programs and approaches used to help taxpayers resolve issues, get rid of debt, and get a fresh start.

Falling behind on taxes does not necessarily mean being stuck in debt for years to come. Even the IRS understands life happens and taxpayers may be affected by circumstances beyond their control. To assist taxpayers unable to pay their tax debts, the government offers several programs designed to provide relief.

Current Financial Position

The IRS realizes it cannot collect more than can be reasonably paid by the taxpayer. As such, when applying for tax relief, the IRS will usually request a statement of the taxpayer’s present financial condition, including, but not limited to, income and expenses, housing costs, financial assets, and potential future earnings. While the IRS wants to collect and will be stringent in its efforts, it does not wish to impose or create a financial crisis or loss of financial security for the taxpayer, which would render the debt uncollectable.

IRS Debt Relief Programs

In general, the best advice is to file and timely pay taxes thus avoiding costly penalties and interest in addition to the original tax owed. However, for those who fall behind and are truly unable to provide payment, help is available through a number of programs.

Installment Agreement

The IRS may agree to an installment agreement allowing taxpayers to pay off the debt over time. After careful review of the taxpayer’s financial condition and ability to pay, the agency may offer an installment agreement requiring monthly payments, typically set-up through automatic payment withdrawals, continuing until the debt is fully paid.

Offer-in-Compromise

Depending on the taxpayer’s personal circumstances, filing history, and financial resources, the IRS may agree to an Offer-in-Compromise (OIC), settling the debt for less than the full amount due. If the OIC is granted, the IRS will reduce the debt owed allowing the taxpayer to pay a reduced fixed sum using a monthly installment program.

Penalty Abatements

In addition, the IRS may consider an abatement of penalties, which often account for more than the original debt. Again, depending on individual circumstances, the IRS will consider personal hardships such as severe illness and hospitalization, such as that brought on by the COVID pandemic, loss of income due to circumstances beyond the taxpayer’s control, or other compelling issues.

Potential Outcomes

While taxpayers are encouraged to address their tax debt and apply for relief programs, the IRS does not accept every application. Each of the above programs, whether individually or applied jointly, will result in detailed scrutinization by the IRS. Reasons for disqualification and declined applications may include:

• All required tax forms have not been filed.
• The applicant has not made required estimated tax payments.
• The responsible taxpayer is currently in an open bankruptcy proceeding.
• A business owner has not submitted all required tax deposits for employees’ payroll withholdings, and/or,
• The taxpayer has the resources to pay the entire tax debt but has chosen not to pay.

While these programs may not be for everyone, they are quite helpful to reduce and rid one of tax debt.

The IRS Fresh Start Initiative

To make it easier for taxpayers to qualify for relief, the IRS has expanded its Fresh Start initiative.

Changes to the Fresh Start initiative make it easier to bring one’s debt under control. Taxpayers may not have to disclose extensive financial details to the IRS to prove their ability to pay. Important aspects of this program include:

• Instead of looking at five years of future income to determine reasonable collection potential, the IRS now considers only one to two years of future earnings for offers, depending on the payment period.
• Taxpayers are now able to include the cost of student loans minimum payments for post-high school education costs as part of their monthly required expenses.
• monthly installments if they cannot pay it in full.
• The IRS has expanded the Allowable Living Expense standards.  This allowance now includes credit card payments, bank fees and charges, and other various allowances.
• The IRS has doubled the dollar threshold for taxpayers eligible for Installment Agreements, which will help more people qualify.

Other Options

Other options available, based on the taxpayer’s individual circumstances, include: “Innocent Spouse Relief” and a tax classification known as “Currently Non-Collectible.”

Innocent Spouse Relief provides relief from tax owed if a spouse or former spouse failed to report income, improperly reported income, or claimed improper deductions or credits.

Currently not collectible is a status the IRS gives to those who cannot afford to make payments on their tax debt. To qualify, tax payments must show cause and significant financial hardships. This status is not permanent. It will be reviewed periodically; and, if situations change, a person may be required to start making payments.

There are options to get rid of tax debt. Which one is most appropriate depends on an individual’s specific tax situation. The best course of action is a consultation with a qualified tax professional who can discuss the pros and cons of each approach.

The good news is tax debt is not a life sentence. With patience and the right approach, it can be addressed and resolved.

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