Tax Attorney Helping Individuals who Owe the IRS in Bergen County and all of New Jersey
If you owe money to the IRS, there are several options available to you. The most important thing to keep in mind is to act. If you ignore the problem, it will only make matters worse. As an arm of the federal government, the IRS has broad powers to collect the money from you by seizing funds in your bank account (issuing levies), garnishing paychecks, filing liens which impact your credit, and in more extreme cases, seizing assets such as a vehicle or real property.
Depending on several factors—most importantly your financial situation—here are some options you should consider if you owe money to the IRS:
- Currently non-collectible status
- Installment agreement
- Offer in compromise
- Innocent spouse relief
- Penalty abatement
The IRS does not act arbitrarily. In most cases, IRS collections base its decision on what you can afford to pay towards the liability. To do so, the IRS will review the financial analysis you provide. There are 3 forms the IRS most often utilizes to complete its financial analysis:
- Form 433-F (Collection Information Statement)
- Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals)
- Form 433-B (Collection Information Statement for Businesses)
The forms are similar, and their basic goal is to collect information regarding assets, debts, and cash flow. Because the IRS will base its decision largely on what’s provided on these forms, it’s important they are prepared with great care.
1. If you owe money to the IRS, you may be eligible for temporary relief.
Currently non-collectible (“CNC”) status is for taxpayers without the cash flow to make payments and have no assets with equity that could satisfy the liability. Not having the cash flow does not mean you wouldn’t be able to afford your Ferrari payment. Rather, it means any monthly payment to the IRS would create a hardship or inability to meet basic, necessary living expenses.
During the time you’re on CNC status, the IRS will not levy your bank account or garnish wages. But you still owe the money to the IRS. So while it provides some tax relief, it’s not a final solution. Moreover, the IRS will review CNC status every year or two. If your financial situation changes, they will require payments at that time.
CNC status is only appropriate in limited circumstances. For instance, if you recently lost your job and are searching for new work, CNC status may be appropriate. But if you’re hardship is longer term—you are employed but still will never fully repay the IRS—an offer in compromise is probably a better solution.
2. You can also pay the tax debt back over time.
Installment agreements are exactly what they sound like—you pay the IRS back in monthly installments. There are a few different types of installment agreements available, but they all require you to have filed all tax returns. Most also require you to pay the tax, interest, and penalties in full, although in some cases, you may qualify for a Partial Pay Installment Agreement. Like CNC status, while an installment agreement is in place, the IRS cannot levy or garnish wages. Depending on how much you owe and how quickly you act, you may even save your credit and avoid a lien. If you’re due a tax refund while on an installment agreement, the IRS will take it and apply it to the liability.
3. The Best Tax Relief: Offers in Compromise
The only true form of tax relief with the IRS is through their offer in compromise program. Of course, the prospect of settling your tax liability is enticing. What’s better than tax relief and a clean slate? But it’s important to understand only a minority of taxpayers will qualify for an offer in compromise. It may be hard to believe with all the radio and internet ads promising “immediate tax relief” and tax cuts in “60 seconds.”
But the adage generally holds true: If it seems too good to be true, it probably is.
The IRS only accepts offers in compromise if there’s doubt they can collect the full amount due or if there’s doubt you owe the tax. And the offer in compromise does not provide “immediate tax relief.” An offer in compromise will take the IRS 6-18 months to process. The good news, however, is that while the IRS is reviewing the offer, they are not allowed to levy your bank account or garnish wages. If they haven’t filed liens yet, however, they will likely do so to secure their interests.
Most offers are based on the fact it’s unlikely the IRS will collect the full tax due. For these offers, the IRS looks at your reasonable collection potential to determine whether to accept your offer. There are also offers based on the doubt you owe the tax, but these offers are much rarer. These offers occur when you haven’t had the opportunity to contest a tax liability and do not believe you owe the amount due. There is a third type of offer in compromise based on effective tax administration, but these types of offers are only accepted in extremely limited circumstances. There needs to be either an economic hardship or extremely extraordinary circumstances compelling public policy and fairness.
4. Is bankruptcy an avenue for tax relief?
It may surprise you that you may obtain tax relief through bankruptcy. Income taxes are dischargeable in bankruptcy court. There are specific requirements to having the taxes discharged in bankruptcy, which is best discussed with a bankruptcy attorney. The general rules are you must wait three years from the date the tax return was due and at least 2 years from the date you filed the tax return for the taxes to be dischargeable. But if you owe money to the IRS, bankruptcy may be a viable option.
CNC status, installment agreements, and bankruptcy are, for the most part, determined based on a financial analysis. If you earn too much income or have sufficient assets to pay the tax liability, there are still two options you can utilize to obtain the tax relief you are looking for: (1) penalty abatements and (2) innocent spouse claims.
5. Penalty abatements
Penalty abatements are not tax relief per se. They do not change the tax owed. But they remove or reduce the penalties you owe, meaning you will owe less overall. If you filed the tax returns on time but didn’t pay, the penalty can be up to 25% of the tax due with interest.
Most of the time, you need “reasonable cause” to have the penalties removed. You must have exercised ordinary business care and prudence.
If you do not have reasonable cause, you may be able to have at least one year of penalties removed through the First Time Abatement process. To qualify for a first time abatement, you simply can’t have had a similar penalty in the 3 prior tax years and must have arranged to pay the tax due.
Penalty abatements are a low risk, moderate reward proposition. It doesn’t take a ton of time or effort to make the request, and if successful, you can at least have a portion the amount due removed. The majority of penalty abatements are denied upon initial IRS review. You get a second bite at the apple if you timely file an appeal.
6. Tax Relief for Innocent Spouses
If you filed a joint return with your spouse and there was understand tax due, innocent spouse relief may be an option. Innocent spouse relief is only available if you did not know of the understated tax. You also must prove to the IRS that it’d be unfair to hold you responsible for the balance due. Unlike the other 5 remedies discussed above, there are time limitations involved for innocent spouse relief. If you wait too long, you may no longer qualify.
In sum, if you owe money to the IRS, there are different avenues you can take to get in compliance with the IRS. There are a lot of factors that go into selecting the appropriate option, but for most options, your financial situation will be the most important option. Whatever path you want to go down, it’s important you act sooner than later to avoid the IRS coming after you.
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