What Options are Available When Dealing with Tax Debt?

Tax Debt

Dealing with Tax Debt

A common question that consumers often want an answer too is how can I  deal with tax debt?  Tax debt can come in several varieties such as State tax debt, B&O taxes, payroll taxes from a business and personal federal and state income tax just to name a few. 

I had the chance to discuss how to handle tax debt on 1150 AM New Urban Unlimited Radio Show in Seattle which you can listen too by clicking play on the player below:

This article will focus on what you can do with dealing with Federal consumer income tax debt.  Federal income taxes can be some of the hardest debt to deal with, although there are options available to you to get you back on track.  The worst thing that you can do is take no action and bury your head in the sand, so be proactive and education yourself about the options that are available to you which you can find below:

(1)    Go on a payment plan with the IRS to Deal With Tax Debt

The first thing that you should do if you owe federal income taxes is to contact the IRS.  The IRS is usually fairly reasonable when in allowing you to go on a repayment plan to pay back the debt you owe based on your current income.  Consumers will want to make sure that all tax returns have been filed and will agree to file returns on time in the future.  Consumers should be aware that there are currently scam artists out there who are frightening consumers on the phone into thinking they have unpaid tax debt.  Consumers should know that the IRS will never call you.  They usually send you a letter which details the taxes that you allegedly owe and your right to dispute any of the claims. 

In general the IRS will accept a repayment plan on $10,000 or less over 36 months and $25,000 or less over 60 months. You will need to determine if you can afford these payments or if there may be better options available to you which you can find below.   

(2)    The next option that consumers can explore is an offer and compromise or going on non collectable status with the IRS to Deal with Tax Debt. 

An offer and compromise is a term the IRS uses for settling a tax debt for less than the full balance.  An offer and compromise can be difficult to obtain and you will need to show some sort of hardship as to why you cannot pay the full balance of the tax debt.  In general the IRS will not accept an offer from a consumer if they believe the consumer can pay back the debt with a lump sum or in payments. 

There are statistics that show that the IRS accepts only 25% or less of the offers they receive and applying for this program takes over a year to complete the review.  The information that consumers need to submit includes 3 months of paystubs, bank statements, credit card, auto, and mortgage statements along with a hardship letter and a break down of household expenses.  Taxes for the years you owe and the previous five years prior to filing the application will also be reviewed.  There is also an application fee of $150 that needs to be paid. 

As far as quailing for non collectable status, consumers have to prove that they have no ability to pay on the taxes and will need to submit proof to back up the claims.  Usually this applies to people who have no source of income or just receive some sort of disability or social security benefits. 

Therefore unless you believe you have a good chance of the IRS determining that you cannot afford a payment plan or lump sum option, applying for an offer and compromise or non collectable status may not be worth your time and the money you will have to pay a lawyer or tax professional to submit your application. 

(3)    Filing For Bankruptcy Could Eliminate Tax Debt or Allow for a Reasonable Repayment Plan

Filing for bankruptcy makes sense for those who are eligible to discharge federal income taxes, those who have other consumer debts that may be discharged in a bankruptcy filing or those looking for a repayment plan over 60 months when dealing with other kinds of consumer debt and federal taxes owed. 

In general federal income tax debt may be dischargeable if:

a.       You did not commit fraud or willful evasion.

b.       It has been 3 years since the tax debt in question was due.

c.       It has been 2 years since you filed the tax return associated with the tax debt.

d.       Your taxes for the year in question have not been reassessed within the last 240 days.  Reassessed is a term the IRS uses if they have reviewed your tax debt or updated the amount that you owe for one reason or another.  If you are not sure if your taxes have been reassessed you should contact the IRS to get confirmation. 

If you qualify for chapter 7 bankruptcy and meet the requirements above the tax debt will be eliminated upon the completion of your chapter 7 case.  Filing a chapter 7 bankruptcy usually takes about 90 days and nobody can collect on a debt from the date of filing.  If it turns out you need to file for chapter 13 bankruptcy and you meet the requirements above, the tax debt will be discharged at the completion of your plan if you are eligible for a discharge.  If the tax debt is determined to be non dischargeable, then you will need to pay the full tax debt off while in your chapter 13 plan for up to 60 months.  If you have other consumer debts, chapter 13 bankruptcy may make sense depending on your income if you are eligible to discharge your other consumer debts. 

Your payment plan in chapter 13 bankruptcy is determined by your household income, family size, amount of priority debt (taxes, child support) and possibly other household expenses that are considered on something called the means test. 

It should also be noted that if you have a tax lien on your property and the lien was placed on the property prior to filing bankruptcy, the tax lien will remain on your property even if you receive a discharge of your tax liability in bankruptcy. 

As you can see dealing with tax debts can be complicated.  If you live in Washington state and have additional questions about how to deal with your tax debt, give Symmes Law Group a call at 206-682-7975 to learn about your options.

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