Tax Resolution Relief Seven methods to resolve your tax debt
There are seven standard options for resolving your tax debt. The only option the IRS gives you at the start of collections is to send in payment in full. What happens is most people ignore the IRS when the IRS demands payment in full. Ignoring the bill happens 80- to 90% of the time the tax departments sends out a tax bill. If you make a payment plan, the payments are often never ending until the payment plan fails and the IRS returns to garnishing assets. Only an attorney, CPA or enrolled agent can represent you to reduce the actual debt through tax resolution. And only an attorney licensed before the US Tax Court can take the case out of the hands of the IRS
The tax resolution process takes about a year to work it’s way through the system for an offer in compromise. Establishing a payment plan is quick but the penalties and interest continue in payment plans. If you do not file taxes, the IRS will often respond by filing a substitute for your return estimating your income often for far more than it is and not allowing any deductions. And until all the returns are filed up to date there is no right to a tax resolution or bankruptcy.
If you continue to ignore them, they may send out a second even higher assessment. Each time you ignore an assesment, the assessed return becomes final and cannot be disputed. Ignore it often enough, and they will
- foreclose on a home
- file a lien on a home
- attach wages
- garnish bank accounts and even
- attach your social security check.
In some cases, the IRS can do a 100% wage garnishment and they can attach social security benefits. Representing yourself is often a disaster. They often ask you to sign away your rights such as signing away the statute of limitations. They ask questions to simply learn where assets are and attach them. Only a CPA, enrolled agent, or a licensed attorney can represent you before the IRS. Very few lawyers have the training it requires. CPAs and enrolled agents often have an extensive knowledge of accounting. But they rarely understand and know the legal principles and they cant take it to the top levels of appeal like the US District Court.
Tax Relief through Bankruptcy
We list bankruptcy as the number one option to discharge income taxes. Only Bankruptcy can discharge income taxes. It does not discharge trust taxes like sales and withholding taxes an employer or retailer did not turn over to the tax department. But it can be used to repay trust taxes and reduce penalties and interest. There are 6 other common options listed after we explain the bankruptcy option. If you owe a tax that involves fraud or a trust tax, your tax debt is generally not dischargeable in Bankruptcy. Bankruptcy can provide a payment plan for these taxes and it can limit the interest and penalties.
Income taxes less than 3 years old are priority debt under 11 USC 1325. Any priority tax must be paid back in full, but income taxes over three years old are not priority debts and are often discharged in Chapter 7 or 13 when you follow the 5 rules. You can age taxes until they are 3 years old if you use other methods such as a payment plan to age the tax. Income taxes do not age however while you are in an offer in compromise.
To discharge income taxes:
- The return must be due over 3 years ago,
- The return must be filed 2 years before the bankruptcy,
- There was no assessment within the prior 240 days,
- Offers in compromise and bankruptcy cases filed within the years before you file will extend the time periods you have to wait to discharge the tax,
- And there must be no attempt to evade the tax.
If you can not lose property in a Chapter 7 bankruptcy, I can’t think of a better cheaper or faster option to reduce or eliminate income taxes. If you can’t or don’t want to use bankruptcy there are 6 other tax relief options our office uses to reduce your taxes and repay. Options like the currently uncollectible status can be used to age income taxes until they are old enough to discharge the income taxes in bankruptcy.
When Bankruptcy can’t be used
Bankruptcy can be a problem for one of the following reasons. Most of the issues with using Bankruptcy to discharge the tax debt is a timing issue. Some people have filed Bankruptcy within the prior 8 years. These people may have to wait before they can file again. In other cases, debtors may not be able to use Bankruptcy because they would lose property. Before deciding not to use bankruptcy as a tool, talk to an expert bankruptcy attorney in this area. Even very experienced bankruptcy attorneys have mis-calculated the dates causing clients to lose the ability to discharge the tax.
Most attorneys have not been a prosecutor with the tax department as I was. They can’t read the transcript codes, they can’t calculate the timing, or don’t know the thousands of pages of rules and procedures in both the tax and bankruptcy codes. They have not been licensed to practice before the US Tax Court since 1988 and the United States Sixth Circuit Court of Appeals as I have been. You only have one shot at getting this right.
Tax settlements through an offer in compromise IRS 7172
An offer in compromise in 2021 generally requires that you turn over your non-exempt property and pay one year of all of your disposable income. If you have few assets and income this may be a very low amount. The attorney or CPA will have to spend hours arguing and getting this approved. There is a filing fee to file the offer in compromise and many accountants and practioners can not get them approved.
An offer in compromise is an official contract to pay a settled debt and it is the only option authorized under the US code and not just the tax code. If you pay the compromised debt and win the mega millions lottery the next day you still only owe the compromised amount. There is nothing the IRS can do to collect it after you make the agreement and pay the offer in compromise. If you enter a payment agreement you still owe the full amount of the tax after you win the lottery and they will collect it.
The Problems with an Offer in Compromise and the CSED date
An offer in compromise is normally harder and more expensive than the bankruptcy option. And the time you spend in the Offer in compromise does not count towards the three years before you can bankrupt the debt. Bankruptcy exempts more property than what is exempted by the IRS. In bankruptcy you would not have to repay one years disposable income in a Chapter 7. What the IRS considers to be disposable income is normally more than what the bankruptcy system sees as disposable.
The Collection Statute Expiration Date (CSED) starts on the date of assessment or the date the return is filed. The CSED date is the date when the collection period for your specific debt “runs out.” Qualifying events like bankruptcy and the offer in compromise extend the 3 and 10 years periods and generally add penalty periods for not completing the offer in compromise. Installment payment plans and currently uncollectible plans allow the clock to run out on these statutes of limitations. Bankruptcy, taxpayer assistance orders, Installment agreements, military service deferments, being outside the US for six months, collection due process hearings, innocent spouse relief applications and offers in compromise all effect the CSED dates.
The IRS averages a year to get an offer in compromise approved. The IRS is just that slow. But an offer in compromise is one option. This option is a better option if you have little or no assets with any equity and little or no disposable income. You do have to pay a fee when you turn in the request, and most people fail to get it approved when they try to submit this themselves. The offer in compromise usually requires you to pay more than you would have paid in a bankruptcy.
Tax Resolutions through Installment payments IRM 5.8
This is one of the worst options, in my opinion. Penalties and interest continue to accrue while you are making the payments. After agreeing to payment over time you still owe the full amount. You are agreeing to pay it in full just to stop the garnishments. You can use this strategy to age the debt until it is dischargeable in Bankruptcy. But it is an agreement to pay the debt in full.
Most installment agreements are for 60-72 months. If you complete the payment plan, the debt is paid. This option does allow you to age the debt until it is past the statute of limitations (10 years) or until the debt is old enough to discharge it in bankruptcy (3 years). The penalties and interest continue to accrue and you must pay off the tax.
By the way, there are over 148 different assessments and penalties the IRS can assess for tax debts making this a poor option. Your goal should be to reduce the balance and not sit back and see it continue to balloon for years until the IRS decides to attach your social security check. Yes, they can attach your social security check to collect income taxes and student loans. Technically they can attach retirement, but they cant, won’t or don’t have the the ability to enforce a retirement fund to turn over assets.
Tax Settlement through Partial Payment installment agreements IRM 5.8
Partial payment installment agreements operate much like Installment payments. Payments can be stretched out for ten years and you are repaying less than regular installment payment. With the partial payment installment agreements the IRS agrees to temporarily accept payments for less than the amount of the tax due to lack of collectability. The partial payment installment agreement is essentially similar to an offer in compromise. The account still ages however like the installment payment program. Taxpayers use these two installment payment methods about 65% of the time to handle their cases.
The IRS likes these options and they are normally your worst tax relief options when you compare them to bankruptcy and the offer in compromise which may repay the IRS little or nothing. If you think you may not be able to make the payments under an offer in compromise you should probably file one of the installment agreement options because they age the tax until you can file bankruptcy.
Kentucky Tax Relief through Penalty Abatement
If I have not said it already, there are 148 different penalties alone plus the interest, which act as a penalty. You can often get a penalty abatement for a first time offender or for a reasonable bases for a penalty abatement. The penalty section of the code is found in IRM § 20. The IRS applies any payments you tender to the oldest tax first and to fines and interests first and principle last. Paying the IRS is a trap which you never get out of. The penalty abatement section is important to know about if your are doing tax resolution because together with an OIC or a partial payment you often substantially reduce the debt.
By applying your payments to the oldest debt first and penalties and interest; it becomes harder to discharge the debt under the statute of limitations or getting a bankruptcy discharge.
Kentucky Tax Resolutions through Currently not Collectible
If you have no assets and no disposable income, the IRS will agree to place you into a currently uncollectible status. Their formula is more harsh generally than qualifying for bankruptcy. If you qualify for Currently uncollectible you probably qualify for the Bankruptcy means test and should simply file bankruptcy to discharge the debt.
The problem is if you win the lottery or go back to making an income, they restart collections. Generally, staying in the currently uncollectible status requires proof of income every year. Only bankruptcy and an offer in compromise closes the door to the IRS starting back up collections in full.
If you want to Resolve your tax debt or bankrupt it please make an appointment.