What's Hidden Under Notorious "Tax Relief Options"?

Coral Springs, FL , March 18, 2014

For quite some time now, particularly after the economic crisis hit our country few years ago, many American taxpayers have acquired some degree of tax debt. IRS statistical reports show that about 12 million of tax accounts have delinquent status. In the old days, you would usually set up a payment plan with the government to sort things out with the IRS. Nowadays things are a little trickier, law and regulations have changed, and more importantly, our economy has changed too.

Paying off your tax debt is possible, for sure, but we believe people need some tax relief education at hand to be able to do it right. That way, they will not only reach the solution which is most appropriate for their situation, but also save money and prevent IRS scams.

America is a land of diversity and millions of immigrants come to the United States every year. I am one of them.  Back in 2006 when it was first time for me to file a tax return I was a little bit puzzled too, and I had a BBA in Finance and proficient knowledge of English, but was not in a tax business yet. There is no formal course for individuals on how to meet your tax obligations or something like that administered by the IRS, there is just that unbearable amount of tax publications that no one in their right mind can read it all.

Just yesterday I had a call for a consultation. The lady said she owes money to the IRS. But her next question bemused me a little. She asked "Can I fight it? Because I read online that payment of tax in the US is voluntary." I guess some people confuse the term voluntary compliance under which US tax system operates. In the country where I am from, the tax system is not voluntary at all; your tax is withheld at any source, period. In the US voluntary compliance means that nobody makes you file your annual tax return and calculate how much you have to pay to the government, it's your responsibility. And it's only up to you to properly disclose amount of income you earned during the year and take all available tax deductions you are entitled to. If you don't do it, then IRS will file it for you, something called Substitute for Return, but don't expect for them to reduce your taxable income or tax dues by any tax deductions or credits, that's not their responsibility. It was yours, and you didn't comply with it, hence the term "voluntary compliance".

This article aims to provide a little guidance on how the IRS starts its debt collection machine, how you can avoid being crushed by it, and how you can reach tax relief without jeopardizing your financial situation with the "help" of unscrupulous tax scammers.

A tax debt situation usually starts when a taxpayer earns income and doesn't pay enough, or any, tax on that income, for some reason or another, and in many instances a very valid reason. Tax debt can also stem from not filing a tax return on time, thus not knowing how much tax is due. The snowballing effect of these actions is staggering as IRS interest and penalties continue to accrue from day one your tax is due and can result in the amount twice as much as your original debt.  

Anyway, those who fail to pay their taxes for a while soon learn (the hard way) that tax obligations are also their personal obligations, and what happens when Uncle Sam thinks they have waited enough. The IRS first sends out a very friendly letter saying that you owe me money, please pay it. If you don't act during the allotted time, IRS notices will not cease, instead they'll rain upon your mailbox. Up until you get a certified letter "Final Notice of Intent to Levy and Notice of Your Right to a Hearing", and oh boy, you'd better not ignore that one, because it has only 30 days for you to come to senses. Before I got into a tax business I had very vague understanding of what the word "levy" means, and not the translation of it, but actual meaning. So if you don't talk to the IRS voluntarily, they have the right to freeze and empty your bank accounts, which is called bank levy, and/or make your employer reduce your paychecks and send its portion to the IRS, a.k.a. wage levy or wage garnishment. These collection actions may also coincide with placing IRS tax lien against your name, which sounds like no big deal at all, but in the long run can bring as much damage as a bank levy. With IRS tax lien attached to your name, your credit goes south, lenders don't approve your loan applications, you cannot buy/sell property along with many other very unpleasant things.  And it is then when we see the weeping and gnashing of teeth begin.

No surprise frantic taxpayers in distress start wandering about or calling their friends to ask rhetorical question "How could they do such injustice to me?", looking for some support and understanding. But later, once they notice Robin Hood isn't coming; they pull themselves together and silently look for tax relief help.

Learning your tax relief options

The very first thing that you must learn is that dealing with tax matters is something to be done with great care. You need the wisdom of an owl, the sagacity of a fox, the speed of a lynx... or the help of good tax resolution professional. Tax law can be very tricky and trying to do things all by yourself may end up like trying to go after an enemy castle without even a shield or a sword to protect you. Don't make that mistake.

There are four different tax relief options for a taxpayer in distress, look no further:

     1.     Obtain Currently Non-Collectible Status, a.k.a. Status 53 or CNC status

     2.     Settle Tax Debt by Filing an Offer in Compromise Application

     3.     Declare Bankruptcy

     4.     Set up Installment Agreement, a.k.a. Payment Plan

Currently Non-Collectible Status is a special situation in which you are in an extreme economic hardship and you are completely unable to pay your tax debt, even $10 a month. You don't have any equity in your assets or no assets at all, and your living expenses far exceed your monthly income. Sounds like it may be applied to you? Then you have to know what probably others don't tell you, CNC status is not a permanent solution. The IRS usually has 10 years to collect your tax debt, after that it is written off your tax account like a bad debt. Let's say on the 3^rd year after your tax was due you lost your job and couldn't pay everyday expenses, and you decided to go on Currently Non-Collectible Status. No more collection harassments from the IRS, peace and quiet. But then, during Year 5 you found a very good job with a hefty paycheck, lucky you, right? Since your employer reports your income to the IRS they would know that your financial situation changed. So what they do? They lift CNC status and your tax account is in collections again, but now with more interest and penalties because they almost never stop to accrue. So consider this tax relief option very carefully, if you have any hope that your financial situation will change during the next 10 years, then maybe it's not the best option for you.  

Next you have the Offer in Compromise. This solution has been heavily advertised in the media for years as the "pennies on the dollar" tax relief panacea. Is it? For some people, definitely! But it is not for everyone. The Offer in Compromise had often been a good source of tax scams too, so you need to be careful. How can you tell? Here is how. IRS uses a set of pre-defined rules and standards to see if you qualify for this program; it's like a math equation which you need to solve. IRS website has their own Offer in Compromise Pre-Qualifier, but know this, they've excluded some legitimate deductions you are entitled to when they calculate your eligibility for a settlement. And since Offer in Compromise is like negotiating a contract with the IRS, don't expect them to lay all their cards on the table, they don't and they never will. If it was that simple, why do you think the entire industry has been created around the Offer in Compromise hype?! So, if you are eligible for a settlement, then by all means, go for it. Mind, the Offer in Compromise has a long list of requirements and conditions, including filing enough supporting documentation to be accepted, so get ready to have lots of papers handy. It also takes a while to get your application accepted, from few months up to 2 years. And do consider to not going solo on it unless you are 100% certain you can negotiate with the IRS. 

Declaring Bankruptcy is usually something we advise against, but it may turn to be an easy way out. You should know that not all tax debts are discharged in bankruptcy. You really would need to consult a good bankruptcy attorney on this. But usually you cannot discharge tax debts on most recent 3 tax years. So if your debt is much older then give it a good consideration and prepare your pocket for a good dip by a bankruptcy attorney. Bankruptcy also leaves very harsh record on your credit report, so lenders may not look at you quite reliably after you declare one. But again, it's solid and proven option worth considering.

And lastly there is an Installment Agreement, a.k.a. Payment Plan, the one which is probably the most comfortable for both the government and you: you agree to pay full amount of your tax debt in monthly instalments. If you owe less than $50,000 then you can set up a Streamlined Installment Agreement and pay your debt over 72 months or less. Once you set up an Installment Agreement, collection actions stop and you are no longer in danger of getting a bank levy or wage garnishment. However, if IRS tax lien has been already filed or IRS is adamant it should be placed to protect their interests, then it can be removed only after your full amount of tax liability is paid off.

For those of you who digest information better in infographic format, we have one here, listing all pros and cons of each tax relief option.

There is a small percentage of taxpayers that may be qualified for Innocent or Injured Spouse tax relief as well, you can find some details about it here.