The consequences of an overdue Internal Revenue Service tax debt can be serious. Penalties and interest accumulate, and the IRS can place a levy against your property. Once the IRS places a levy on your property, even bankruptcy can't remove it. Fortunately, a number of options exist that might help you manage your IRS tax debt.
The IRS is generally receptive to a proposal to pay an overdue tax bill in installments, as long as you haven't defaulted on a payment plan before. If you owe more than $50,000 including penalties and interest, however, the IRS will conduct an examination of your finances before it determines whether or not to accept your offer. You must file all back tax returns to get a payment plan approved. The minimum payment is $25 per month, although the IRS may insist on more than that if you owe enough. Although penalties and interest will continue to accumulate until your account is current, the IRS won't take collection action unless you default.
Under Status 53, also known as hardship status or noncollectable status, the IRS simply agrees to refrain from collection activity for a certain period of time, such as two years. If you are running a business that may become insolvent if the IRS institutes collection activity, Status 53 could help you generate revenue with which to eventually pay the tax, a benefit that might be persuasive to the IRS. Penalties and interest continue to accumulate during this period.
Offers in Compromise
An offer in compromise is relatively difficult to obtain because it requires the IRS to forgive a portion of your tax bill. The IRS is most likely to extend one if there is serious doubt about the legitimacy of your tax bill, since granting an offer in compromise is easier than losing a court battle. The IRS may also grant an offer in compromise if it concludes that you will never be able to pay your outstanding tax bill, or if requiring you to pay the full amount would pose an unreasonable hardship on you.
If your overall finances are in bad shape, discharging some of your tax debts in Chapter 7 bankruptcy might make sense, because it could leave you capable of paying off the remainder of your tax debts. You can't discharge all of your tax debts -- debts younger than three years old can't be discharged, for example, and you can't discharge debts that the IRS assessed more recently than 240 days before you filed for bankruptcy. Moreover, if you tried to either illegally evade or defraud the IRS, you won't be able to get that debt discharged either.
The Taxpayer Advocate
The Taxpayer Advocate Service is a division of the IRS that enjoys a certain degree of independence from the rest of the IRS. The TAS can help you navigate the IRS bureaucratic maze, and it might be able to help delay default notices, postpone collection activity or help get a tax levy released than originally expected.
- Internal Revenue Service: IRS Help for Financially Distressed Taxpayers
- Internal Revenue Service: The Taxpayer Advocate Service is Your Voice at the IRS!
- FindLaw: Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy
- Internal Revenue Service: Offer in Compromise
- Internal Revenue Service: Payment Plans, Installment Agreements
- Howard S. Levy: Is There Such a Thing As a “Hardship Status” With the IRS?
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.