IRS Hardship Rules for Delinquent Taxes

Filing your tax return on time can save you money even if you can't pay right away.

A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com

Because of penalties and interest, your IRS tax debts can escalate quickly if you don't pay them on time. For taxpayers facing economic hardship because of overdue tax debts, the IRS has established several programs that allow you to pay on more favorable terms. If you are still not satisfied, you can demand a tax hearing.

Installment Payment Plans

If your total tax debt is no more than $50,000 including penalties and interest, the IRS is likely to approve an installment payment plan if you apply online or complete Form 9465-FS. If you owe more than $50,000, you must also complete Form 433-F. The IRS will conduct a detailed investigation of your finances, and may refuse your request. Even if the IRS approves a payment plan, penalties and interest will continue to accumulate during the repayment period. Nevertheless, the IRS won't institute collection activity as long as you remain current on your payments.

Offers in Compromise

An offer in compromise is an offer to settle your tax liability for less than the amount the IRS says you owe. Although the IRS does not easily accept offers in compromise, you can apply by filing Form 656 and Form 433-A. Generally, the IRS will grant an offer in compromise only if there is doubt as to the legitimacy of your tax debt, if it concludes that you will never be able to pay your tax debt even if your assets are sold, or if paying your tax debt would result in an extraordinary or unfair hardship on you. You can't obtain an offer in compromise during an open bankruptcy case.

Hardship Status

In some cases, the IRS will agree to suspend collection activity against you for a certain period of time. To qualify, you need to submit to an IRS examination of your finances. You must satisfy the examiner that you have little or no assets or income, and that IRS collection activity would create a "hardship"--defined by the IRS as the inability to meet necessary living expenses. Penalties and interest will continue to accrue during the hardship period, but the IRS will not take action against your property. This option may make sense for both you and the IRS if it is necessary to prevent the seizure of business property that you might eventually be able to use to generate income to pay your tax debt.

Opposing the IRS

If the IRS places a lien on your property, you may be able to obtain a hearing to get it released. Two avenues of dispute are possible--the Collection Appeals Program and the Collection Due Process program. While the possible grounds for demanding a hearing under the Collection Due Process program are quite limited, you may appeal an unfavorable decision to a federal court. Although the possible grounds for demanding a hearing are much broader under the Collection Appeals Program, it is very difficult to appeal an unfavorable decision.

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