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TAX NEWS - 2010

IRS Debt

Debt owed to the Internal Revenue Service (IRS) is called IRS debt or tax debt. IRS debt may be a very stressful situation for a consumer to deal with. When tackling one's IRS debt, the first step in doing so is deciding if one should do it alone or use a tax debt professional. It is recommended if one owes $10,000 or more in tax debt to utilize the services of an IRS debt professional.  Qualified tax professionals to deal with IRS debt are Certified Public Accountants (CPAs), tax attorneys, and enrolled agents. Enrolled agents may practice in any state in the US whereas CPAs and tax attorneys may only practice in states in which they are licensed.

Secondly, the consumer facing tax debt should scrutinize his or her original tax returns in order to see if perhaps some applicable deductions have been overlooked when the tax returns were first filed. If the consumer finds some deductions that have indeed been overlooked, the consumer may amend the original tax returns and consequently, reduce the amount that he or she owes to the IRS in tax debt. However, there is a lot of paperwork that must be completed in order to amend a previous tax return and without the proper documentation and execution an IRS audit may be in the consumer's future.

Once the decision has been made whether to use a tax professional or to file back taxes or to make an amendment to a prior tax return, there are five paths one may take in order to get out of debt from the IRS. The five different ways to get out of IRS debt is filing bankruptcy, installment agreement, not currently collectible, partial payment installment agreement, and offer in compromise.

Filing for bankruptcy under Chapter 7 or Chapter 13, if qualified to do so, is one way to discharge one's IRS debt. However, it is important to understand the complete consequences of executing this action, mainly the long lasting, crippling effect on one's credit history and credit score. Chapter 7 bankruptcy involves the full discharge of one's debts, including IRS debt. On the other hand, Chapter 13 bankruptcy involves a Wage Earner Plan or a repayment plan to compensate for some of the allowable debt. Additionally, it is important to note that IRS debt that arises from the taxpayer's simple failure to file a tax return is not capable of being discharged. There are five criteria that the IRS debt must meet in order to be discharged in either of the above mentioned bankruptcy chapters. They are:

1. The taxpayer filing for bankruptcy is not guilty of evasion of taxes.

2. The tax return was not false or fraudulent.

3. The tax return was filed at least 2 years before the taxpayer files for bankruptcy, measured from the date the taxpayer actually filed the tax return.

4. The due date for filing the tax return is at least 3 years ago, including any extensions.

5. The tax assessment of the IRS is at least 240 days old before the taxpayer files for bankruptcy.

A second way to get out of IRS debt is through setting up and making timely payments on an installment agreement. An installment agreement is an agreement to make a payment of the same amount every month, similar to a mortgage or auto payment. It is important to note that there is also a fee associated with setting up the installment plan or agreement with varying costs depending on whether a direct debit installment agreement is used or some other payment method is used for the IRS installment agreement. Furthermore, there are also fees associated with reinstating an installment agreement that has been defaulted and restructuring a current installment agreement. The Form 9465 is needed to request an installment agreement with the IRS or an online application tool from the IRS website may be used. It is advisable to consult with a tax professional if one owes $10,000 or more in IRS debt because an installment agreement request may not be automatically accepted, and thus, professional negotiations may be in order.

Another path to get out of IRS debt is through the IRS program called not currently collectible. This IRS program is where the IRS will agree not to currently collect a taxpayer's IRS debt for a specified amount of time, typically a year or a little more. As a result, all collection activities such as garnishment of wages and levies will cease. Moreover, the statute of limitations on tax debt collection still accrues while a tax payer is in the not currently collectible program. This means that the taxpayer's IRS debt will be eradicated if the IRS cannot collect what is owed to them in the given 10 year time period. In order to become a part of this program, a taxpayer must fill out and submit the Form 433-F to the IRS.

Yet another way of getting out of IRS debt is the partial payment installment agreement. This pathway of getting out of IRS debt is similar to the above mentioned installment agreement in that payments of the same amount are made every single month. However, the difference between the two lies in the fact with the partial payment installment agreement, the repayment plan does not pay off the IRS debt in full. The remainder of the IRS debt is in essence written off. This option is not only a relatively new option (implemented by the IRS on January 17, 2022) but highly involved in negotiations where lots of documentation is needed, including Form 433-A (Collection Information Statement) to support the negotiation tactics. Consequently, a tax professional is highly recommended to execute this particular method of getting out of IRS debt.

The last but certainly not least method of getting out of IRS debt is called offer in compromise. An offer in compromise with the IRS is essentially a request to settle with the IRS for less than what the taxpayer owes. Just as with debt settlement with other types of creditors, e.g. credit card companies, the IRS may deem it considerably more effective to settle with a taxpayer for less than the full balance. This method is highly recommended to be undergone with the assistance of an experienced tax professional. The forms needed for this method is Form 656 (Offer in Compromise), Form 433-A (Collection Information Statement), and Form 433-A Worksheet (in order to calculate the payment amount). Additionally, in the offer in compromise route to getting out of IRS debt, the taxpayer also agrees to forego any tax credits or refunds applied to the taxpayer's IRS debt before the taxpayer submits his or her Form 656 or Offer in Compromise paperwork as well as pay his or her tax returns on time for the next 5 years.
As with some of the other methods, there is a fee associated with this path of getting out of IRS debt.

In summary, IRS debt is a very important matter that should be attended to immediately to avoid any negative repercussions. Experienced tax professionals such as a tax attorney, CPA, or an enrolling agent may prove very useful to taxpayers trying to get out of IRS debt.
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