If you owe IRS tax debts, you probably see and hear a ton of advertisements concerning IRS tax relief. What exactly does this mean, and what are the specific types of IRS tax relief?
Offer in Compromise
The first type that people think of is settling IRS tax debts. This is known as the Offer in Compromise program that is referenced in IRS Form 656. When you hear of someone “settling tax debts for pennies on the dollar”, it is the Offer in Compromise program that they are referring to.
An Offer in Compromise will require a full disclosure of your financial history, including current income and expenses, and assets and debts. The IRS has formulas based upon what it considers to be reasonable expenses for your region, along with suitable deductions. It’s hard for me as a tax attorney to determine exactly what the overall payment will be without going through all the calculations and reviewing income and asset information. So, it’s important to be thorough; as you might expect, the IRS scrutinizes these applications carefully, and it’s important to be accurate.
Believe it or not, but there are certain cases in which individuals can file bankruptcy and eliminate IRS income tax debts. And, I stress income taxes; you cannot wipe out delinquent sales taxes or payroll taxes, for example. It must be income tax.
There are 3 main rules in the Bankruptcy Code that are to be followed if you wish to discharge income taxes:
- the taxes owed have to be more than 3 years old. For example, if you filed a bankruptcy case on April 16, 2014, you could not wipe out (discharge) income taxes for the years of 2013, 2012 or 2011, but you could indeed discharge income taxes owed for the years beginning with 2010 and prior;
- importantly, you must have actually filed your income tax returns at least two full years prior to filing your bankruptcy case. So, if you have Substitutes for Returns, and you’ve never corrected them, then you aren’t eligible to wipe out those taxes
- moreover, the IRS has to have “assessed” your tax liabilities at least 240 days prior to filing your bankruptcy case. It’s important to get an Account Transcript for all of your tax years from the IRS to see when the dates of assessment were.
IRS Installment Agreement
Some people may not be good candidates for an Offer in Compromise (maybe their income is too high, or they have too much equity in their property). Those same people might not be good candidates for bankruptcy (especially if they’ve got Substitutes for Returns). In such cases, the IRS may offer attractive repayment options to repay the taxes owed over a longer period. The IRS will agree to repayment arrangements for up to 72 months. In many cases, especially where there is more than $50,000 in taxes owed, then more complete financial forms must be submitted in order to offer the IRS a clearer picture of assets and income.
Uncollectible Status (Status 53)
In some situations, certain taxpayers may not be good candidates for an offer in compromise or for a bankruptcy filing. Instead, they may simply want relief from current tax collections. The IRS will agree to place taxpayers into a status known as Uncollectible; the IRS lingo for this status is known as “Status 53”. This does not mean that you don’t owe the underlying tax obligation. It simply means that the IRS will cease collections for those tax amounts for a certain period of time. If you’re going through a period of financial hardship, then you may be a good candidate for Status 53.
Innocent Spouse Relief
If you filed a joint tax return with your spouse, and you knew nothing about your spouse’s unreported income or disallowed deductions, then you may be a candidate for IRS Innocent Spouse Relief. A case for such relief is stronger in the event of some form of fraud or deception on the part of your spouse.
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