Obtaining “Currently Not Collectible” Status for IRS Tax Debt Relief from andersonbradshawtax.com Possible article: IRS Tax Debt: What You Need to Know Are you struggling with IRS tax debt? You're not alone. According to the IRS, over 14 million taxpayers owe back taxes, penalties, and interest. If you're one of them, you may feel overwhelmed, ashamed, or confused. But ignoring the problem won't make it go away. In fact, it may make it worse. The IRS has powerful tools to collect unpaid taxes, such as wage garnishment, bank levies, property seizures, and even criminal prosecution. However, you have rights and options. This article will help you understand the basics of IRS tax debt and how to deal with it effectively. The Anatomy of IRS Tax Debt IRS tax debt can arise from various sources, such as: - Unpaid income taxes: If you don't pay the full amount of taxes you owe on your tax return by the due date, including extensions, you'll incur interest and penalties on the balance. The interest rate changes quarterly and is currently 3% per year, compounded daily. The failure-to-pay penalty is 0.5% per month, up to a maximum of 25%, based on the unpaid balance. If you file your tax return on time but don't pay the taxes due, the penalty is reduced to 0.25% per month, but the interest still applies. - Unfiled tax returns: If you don't file your tax return by the due date, including extensions, you'll incur a failure-to-file penalty of 5% per month, up to a maximum of 25%, based on the unpaid tax. If you file your tax return more than 60 days late, the minimum penalty is $435 or 100% of the tax due, whichever is less. If you owe taxes and don't file a tax return, the IRS can file a substitute for return (SFR) on your behalf, which may not include all your deductions and exemptions, and assess the tax accordingly, plus interest and penalties. Once the IRS issues a notice of deficiency (also known as a 90-day letter), you have 90 days to petition the Tax Court or pay the tax and sue for a refund in district court. - Tax audits and assessments: If the IRS audits your tax return and finds errors or omissions, it may assess additional taxes, interest, and penalties. You have the right to appeal the audit results within 30 days of the proposed changes, either administratively or in Tax Court. If you don't appeal, or if the appeal is denied, the assessment becomes final and enforceable. The IRS can collect the assessed amount by various means, such as liens, levies, and seizures. You can also request an installment agreement, an offer in compromise, or currently not collectible status, depending on your financial situation and other factors. - Trust fund recovery penalty: If you're responsible for paying payroll taxes on behalf of your business, such as federal income tax withheld and Social Security and Medicare taxes, and you willfully fail to do so, the IRS can assess a trust fund recovery penalty (TFRP) against you personally. The TFRP is equal to the total amount of the unpaid trust fund taxes and can be enforced by collection action against your assets and income. You have the right to appeal the TFRP within 60 days of the notice and request a hearing with the IRS Office of Appeals. Now that you know the main types of IRS tax debt, let's explore some practical strategies for dealing with them. How to Resolve IRS Tax Debt 1. Negotiate a payment plan. If you owe less than $50,000 in combined tax, interest, and penalties, you can apply for an online payment plan or call the IRS at 1-800-829-1040 to set up a payment agreement. You'll need to provide your personal and financial information, such as your name, address, Social Security number, income, expenses, and assets. The IRS will review your application and notify you of the monthly payment amount and due date. You can choose among several payment methods, such as direct debit, check, money order, or credit card (with a fee). Keep in mind that interest and penalties will continue to accrue until you pay off the entire balance, and that any missed or late payments may trigger default and collection action. 2. Offer a compromise. If you can't afford to pay the full amount of your tax debt, you may be eligible for an offer in compromise (OIC). An OIC is a settlement with the IRS that allows you to pay less than the full amount owed, based on your ability to pay, your income and expenses, and your equity in assets. To qualify for an OIC, you must meet certain criteria, such as: - You can't pay the full amount through a payment plan or other means. - You have filed all required tax returns and made all required estimated tax payments for the current year. - You're not in an open bankruptcy proceeding. - You're not a debtor in a pending offer in compromise or appeal. - You have demonstrated a reasonable collection potential (RCP) to the IRS, which is the amount that the IRS can expect to collect from you over a certain period of time, based on your income and assets. To apply for an OIC, you'll need to fill out Form 656, Offer in Compromise, and pay a non-refundable application fee of $205, unless you qualify for a low-income waiver. You'll also need to provide detailed financial information, such as your bank statements, investment accounts, real estate, and vehicles, as well as a written explanation of why you believe the IRS should accept your offer. The IRS will review your application and may request additional documentation or clarification. If your offer is accepted, you'll need to pay the agreed amount in lump sum or installments within a certain period of time, usually up to 24 months. 3. Claim innocent spouse relief. If you filed a joint tax return with your spouse or ex-spouse and you're being held liable for the entire tax debt, including interest and penalties, you may be able to claim innocent spouse relief. This means that you're not responsible for the tax under the equitable relief provisions or the allocation of liability provisions, if you meet certain conditions, such as: - You didn't know, and had no reason to know, that your spouse or ex-spouse understated the tax or claimed improper deductions or credits. - You didn't benefit, and had no reason to benefit, from the understatement or improper items. - It would be unfair to hold you liable for the tax, based on all the facts and circumstances. To claim innocent spouse relief, you'll need to file Form 8857, Request for Innocent Spouse Relief, within 2 years after the first collection action against you. You can also file the form before that time if you're seeking equitable relief. You'll need to provide detailed information about your marital status, income, expenses, assets, and liabilities, as well as your spouse's or ex-spouse's income, expenses, assets, and liabilities, and the reasons why you believe you qualify for relief. The IRS will review your application and may contact you or your spouse or ex-spouse for additional information or documentation. If your request is granted, you'll be relieved of the tax, interest, and penalties that you're not responsible for, and the IRS will collect them from your spouse or ex-spouse. 4. Seek professional help. If you're not comfortable dealing with the IRS on your own, or if you have complex tax issues, you may want to hire a tax professional, such as a tax attorney, a certified public accountant (CPA), or an enrolled agent (EA), to represent you. A tax professional can help you: - Understand your rights and responsibilities under the tax law. - Communicate effectively with the IRS and negotiate on your behalf. - File missing or amended tax returns and claim all applicable deductions and credits. - Analyze your financial situation and recommend the best course of action. - Protect your assets and income from collection action. - Prepare and submit appeals, petitions, or other documents to challenge the IRS decisions. However, be cautious when choosing a tax professional and don't fall for scams or promises of unrealistic outcomes. Check the credentials, experience, and reputation of the tax professional and ask for a written agreement that outlines the scope of services, the fees, and the responsibilities of both parties. In conclusion, IRS tax debt is a serious and common problem that requires attention and action. By understanding the causes and consequences of IRS tax debt, and by using the available tools and strategies, you can reduce your stress and liability, and regain your financial freedom. Don't hesitate to seek help if you need it, and don't ignore the IRS notices or deadlines. Remember, the IRS is not your enemy, but a federal agency that enforces the tax laws and collects the revenue needed to fund the government programs and services. By complying with the tax laws and resolving your tax debt, you're not only fulfilling your civic duty, but also protecting your reputation, your credit score, and your peace of mind. Summary IRS Tax Debt Types How to Resolve Unpaid income taxes Negotiate a payment plan Unfiled tax returns Offer a compromise Tax audits and assessments Claim innocent spouse relief Trust fund recovery penalty Seek professional help Note: The information presented in this article is for general educational purposes only and should not be construed as legal, tax, or financial advice. Always consult a qualified professional before making any decisions or taking any actions related to IRS tax debt.