A serious financial decision with several implications, declaring bankruptcy will only absolve tax debts with very specific requirements. For tax debt to be discharged in a bankruptcy the following must be true:
- Tax debt is result from an income tax return filed at least two years prior to bankruptcy.
- Tax debt is result from an income tax return that which the due date was at least three years prior to bankruptcy.
- Tax debt has been assessed by the IRS at least 240 days prior to filing bankruptcy.
- Tax payer is not guilty of tax evasion or fraud.
There are two different types of bankruptcy filings, Chapter 7 and Chapter 13. Chapter 7 discharges all debts, while Chapter 13 will still involve paying off some of your debts, generally at a lower rate. Any tax debt that is included in a bankruptcy filing will extend the statute of liability of that debt for the time in bankruptcy.
Currently Not Collectible
The IRS must desist all collection activities, and determine the tax liability ‘currently not collectible’ if the tax debtor can prove without reasonable doubt that they are unable to pay their tax debt.
You must provide significant proof that you are not able (nor will you be able) to pay your tax debt as well as IRS Form 433-F to request currently not collectible status.
The IRS has the right to review your eligibility for this status for the remaining statute of limitations on the debt.
Innocent Spouse Relief
You may be able to reduce or remove your tax debt if you can prove that the resulting penalties were no fault of your own, but in fact, occurred from an erroneous income tax return filing by your spouse or ex-spouse completely unbeknownst to you. You must be able to prove to the IRS that when your spouse filed, and you signed the joint return, you were unaware (and had no reason to be aware) of the underestimated joint tax liability. To request innocent spouse relief, provide a detailed explanation and any proof you have of the situation, along with IRS Form 8857 to the centralized processing location at:
IRS – Stop 840-F Innocent Spouse PO Box 120053 Covington, KY 41012
The IRS will forgive and waive compounding fees from penalties and interest due to late or no payments if you qualify with a reasonable cause. Reasonable cause as defined by the IRS will generally include: the death, serious illness or injury of yourself or a family member, unavoidable absence or situations outside of your control such as a civil disturbance, severe weather, or simply a lack of funds. Also, if you can prove that the fees and penalties were incurred due to ill advice from an IRS employee you can qualify for penalty abatement.
Filing for penalty abatement is relatively simple. Along with IRS Form 843, provide written documentation of your reasoning along with any proof you have of the situation to the IRS.
Partial Payment Installment Agreement
Established as recently as 2005, the partial payment installment agreement allows you to make monthly payments towards the repayment of your IRS tax debt. However, instead of paying off the entire amount of debt owed, you will only make payments for a certain amount of time, paying off a portion of the total amount. This method is used when the IRS doubts that you will be able to pay off the debt of the balance, but still expects a reasonable amount of collectability from you.
There are several aspects of your situation that the IRS will review and consider; including your debt balance, the remaining statute of limitations on the debt and your collection potential. Filing for the agreement involves utilizing a complex equation to determine total debt and payments owed as well as several months of backup documentation, a formal request, and the completion of both IRS Forms 9465 and Form 433-A.
It is recommended that you at least meet with a tax professional to determine if this is the right course of action for you.
A straightforward payment agreement proposed by you to the IRS; the installment agreement plan is recommended if you are facing a smaller amount of tax liability and feel that you will be able to pay it off in monthly installments.
The IRS must accept any proposed installment agreement if your tax liability is less than $10,000 and your suggested monthly payment will satisfy your total debt in three years.
Outside of these circumstances, the IRS must review and approve your proposal; which takes about 30 days. The easiest tax debt resolution method, you or your tax professional can initiate a proposal three ways: by filling out Form 9465, the Online Payment Agreement Application or by calling the IRS at 1-800-829-1040.