Tax debt is not easily forgiven, and it certainly isn’t forgotten. The IRS is a harsher creditor than most and likely won’t overlook a tax debt even in dire financial circumstances. But that doesn’t mean all hopes of dealing with your tax debt are dashed. Knowing your options is crucial. There are multiple ways to deal with the IRS’ collection methods when pressed, and there are even a few rare situations where you can seek IRS debt forgiveness or a debt release. Let’s explore them together.
Scenario #1: What If the IRS Made a Mistake?
The first scenario is, unfortunately, also the rarest for most taxpayers with significant tax debt. The truth is that American taxpayers owe billions of dollars in combined tax debt. In 2014, about 18 million taxpayers were estimated to owe the government an additional tax liability due to penalties, miscalculated returns, missed payments, missing income, or another reason.
Despite having a general awareness of how much the government is missing in taxes, the IRS has neither the manpower nor the information to go after every instance of tax debt accurately. When it does, it tends to be thorough. But that does not mean the IRS never gets things wrong. If you’ve received a notice of tax debt that you know can’t be true, your first order of business should be to talk to a lawyer.
A legal representative can help you review your case and ensure you have everything you need to appeal the IRS’ decision to go after your tax account and win. Seeking legal representation is essential because the IRS will want convincing evidence to support that they made a mistake and may wish to ask further questions. In cases where the taxpayer’s debt was only erroneously attributed to their account, the IRS will usually rescind their notice, and you won’t owe anything.
Scenario #2: It Wasn’t Your Fault (Innocent Spouse Relief)
What if your tax return did omit crucial information, but you had no idea? That’s the basic premise of seeking partial or complete innocent spouse relief. This is a system for couples that file jointly; wherein one partner had no idea that the other had income that they did not include in the return or made a mistake. Innocent spouse relief works on paper, but it’s not relatively so easy to fight for in real life.
The IRS will generally require substantial evidence to prove that the spouse claiming to be innocent did not know about the cause of the debt, which can be difficult to argue, especially if your expenses and finances are naturally intertwined. Some cases are a little more clearcut than others. If you, as the innocent spouse, are never involved in your partner’s business, then you might not know that they never spent that ad money that they deducted from your joint return.
Given that you have no involvement with your spouse or ex-spouse’s business, you have a reasonable reason not to know. The IRS will also consider so-called Indications of Unfairness when determining whether or not to include you in the penalties and debt your spouse has incurred. Factors the IRS may deliberately include:
- Whether or not you specifically benefit from the understatement in your tax liability.
- Whether or not you were separated or not when the mistake was made.
- Whether or not your spouse left you.
Innocent spouse relief is another instance of tax debt relief where seeking the help of a legal professional is essential. You must defend your statements and arguments and present any available evidence.
Scenario #3: Negotiating an Offer in Compromise
At this point, our tax debt resolution boils down to minimizing your tax debt rather than finding ways to eliminate it. For taxpayers who are treading water but still able to pay the bills and put some food on the table, the IRS has the offer in compromise. An offer in compromise boils down to a series of simple questions that you will need to back up with financial statements and a thorough review of your current status:
- Do you have any remaining assets you could sell to pay off your debt? If no,
- Is your disposable income (i.e., anything left after taxes) enough to pay off your debt in about 72 monthly installments? If no,
- What can you afford to pay per month?
That last question will establish your offer in compromise to the IRS, which they can accept or deny. The IRS notoriously does not accept many offers in compromise. One key reason is that they might calculate your reasonable collection potential (i.e., what you can afford to pay per month) as higher than what you’re offering. While the IRS won’t tell you what they determine to be your RCP, your goal for an initial offer is to get as close as possible to it without dipping under it.
Offers in compromise result in an individualized payment plan that doesn’t change, even if your financial circumstances approve. These unique payment plans are often shorter than the usual 72 months, as well – as a result, your effective debt may be reduced from several thousand to just a few hundred dollars, depending on the severity of your situation. But don’t let miracle cases fool you – an offer in compromise is always a gamble and shouldn’t be considered without consulting a tax professional.
Scenario #4: The Clock Runs Out
One last unlikely scenario is that the IRS forgets about your debt. Tax debt expires after about ten years. This is also unlikely and not something you should count on – especially if you owe a significant amount of money. Not only can that debt multiply over time through interest and penalties, but the IRS can employ decisive collection actions to coerce payment, even in a debt’s final days. Always address your debt with the IRS as soon as you can. IRS penalties and interest rates can be harsh, and you are usually better off taking a quick credit to get the IRS off your back than waiting things out.
Get Tax Help Today
No matter your situation with the IRS, if you are in trouble – an erroneous debt or a severe financial hole and an outstanding tax liability – do not hesitate to seek legal help! Dealing with the IRS can be frustrating, and there can be many hoops to jump through to overcome tax debt, even under ideal circumstances. Traxion Tax’s team of experienced tax professionals can help you find your best path toward returning to the IRS’ good side.