How To Deal With IRS Back Taxes

How To Deal With IRS Back Taxes


The IRS is one of the most powerful government agencies, and they have the power and authority to ruin your life whenever they are betrayed. They can seize your assets, leave you searching for help with property tax liens, tap into your wages, and destroy your credit report. The good news is the IRS is not as bad as it used to be in the past.  In recent years, they have become more willing to work with the taxpayers by providing more options to resolve your tax debt problems. The key to evading trouble from the IRS is proper communication on a timely manner. As long as you are explaining your situation to them every step of the way, this will establish rapport and open up more resolution options in the future. Remember, it’s better to take a preventative approach than to find yourself Googling “how do I remove IRS tax liens from my property?”

Think of the IRS as the spouse you wish you never had. You can choose to fight with him/her, and he/she can make your life a living hell– OR, you can try to work things out.  Now think of your tax attorney as your marriage counselor. He facilitates the communication between you (the taxpayer) and the IRS.  

Now there are a number of things you can do to resolve your tax debt problems. Some are simple enough that you can do on your own. However, others are much more complicated and require ample knowledge of the tax code, so seeking tax resolution services would be recommended.

Can a Tax Attorney Really Help with Past Tax Debt?

The short and obvious answer is Yes. Tax attorneys are highly trained tax professionals who can help resolve your tax problems using a variety of tax solutions. Tax attorneys provide you with certain benefits that other tax professionals may not. Below are two important benefits:

  • Attorney-Client Privilege: This legal concept ensures that all the information shared with the tax attorney is kept strictly confidential. This allows the client to feel safe when disclosing all pertinent information. When more information is shared, the attorney is able to better analyze the situation at hand, and ultimately provide better advice and a more effective representation.
  • Representation: Unlike other tax professionals, a tax attorney can provide you with the power of attorney representation. The tax attorney can represent and speak on your behalf when dealing with all IRS interactions. A tax attorney can also represent you in court, a benefit not provided by other tax professionals (unless they passed exams to practice before a Tax Court).

Tax attorneys are the most equipped with dealing with complex tax laws. They usually have the knowledge and background to provide broader, more comprehensive solutions tailored to the specific tax problem a client faces. Tax attorneys generally also possess superior negotiation skills compared to other types of tax professionals. This is a useful tool to have when negotiating settlements such as an Offer in Compromise, or attempting to remove a property tax lien.

File And/Or Amend Past Tax Returns:

The first thing you should do when you are dealing with a back-tax problem is file your missing tax returns, even if you are financially unable to pay your tax debts at the moment. Remember, not having enough money to pay what you owe is not a crime by itself.  In addition, failing to file your return will increase your debt amount by accruing more penalties as well as interests on those penalties. This will also break the trust between you and the IRS, which is very important if you want to have favorable outcomes when dealing with IRS agents.

After filing your missing tax returns, I would suggest taking another look at your past filed returns. Sometimes, when a person has not filed a tax return in a while, the IRS will file a tax return on your behalf based on the information they have. This is called a substitute return, and as you may predict, it is prepared in the best interest of the government. The substitute return has minimal exemptions, credits, and deductions, so the amount you owe would be much higher than it should.

So, preparing your own tax return is an easy way for reducing your tax debts by taking advantage of these exemptions and deductions. In some cases, you may even find yourself with a refund from the IRS, and that could be applied against a balance owed to the IRS. It is also worth noting that the statute of limitation to claiming your refund is three years. Thus, filing your return within three years from the original filing deadline is important.

Now after you are sure that all your tax returns are filed, and are certain the information is those returns are accurate, you can then start figuring out how to pay any tax debts you owe. Seeking tax resolution services is always a good way to know and understand which is your best option when tackling your tax debt problems. Below are some options you might consider:

Penalty Abatement:

With an abatement, you may be able to reduce or eliminate your penalties and interest, but you will still owe the original tax amount you owe. This may be a good option if you can afford to pay the amount owed, but feel that you should not be held liable for paying the penalties due to factors that were out of your control. For example, let’s say you were dealing with a major illness that caused you to miss a tax debt payment. In this case, you will most likely qualify for a penalty abatement since the factor causing the penalty was out of your control; therefore, you should not be punished for it. Other reasons that qualify for a penalty abatement might include: Theft of records, natural disasters, death of a close family member, incarceration, etc. Essentially, it includes any factor that was out of your control that directly affected your ability to properly file or pay a tax debt.

Installment Agreements:

Installment Agreements are one of the most common methods of paying your tax debts. As the name suggests, you set up monthly installment payments to the IRS which allows to pay your debt over a certain period of time. It is important to note that you will also be paying interest during this time, so the shorter your payment plan, the less money you will end up paying.

Here are some of the different types of installment agreements:

  • Guaranteed Installment Agreement: This is the simplest form of agreement, and as the name implies, this installment agreement is guaranteed if you meet certain requirements:
      1. Owe less than $10,000 is back taxes
      2. Agree to pay balance over 3 years
      3. Are not in bankruptcy
  • Streamlined Installment Agreement: This agreement is recommended for taxpayers who owe up to $50,000 and do not have enough assets to pay their debts in a single payment. This installment agreement does not require full financial disclosure. Other requirements include:
      1. Taxes owed not longer than 5 years
      2. Are not in bankruptcy
      3. Agree to pay balance over 5 years (less than $25k) or 7 years ($25k-$50k)
  • Partial Payment Installment Agreement: This allows the taxpayer to pay part of the amount owed to the IRS, by making payments until the statute of limitation expires. A tax professional is highly recommended when applying for this type of agreement.

Offer in Compromise

This resolution method gets the most of the publicity with commercials promising you to settle your debt for “pennies on the dollar”. Although this is exaggerated and extremely misleading, if the circumstances are right, the Offer in Compromise option can be the best route for a taxpayer with back taxes. In fact, an Offer in Compromise is a great option if you qualify. It takes off all liens on your property, and it is not reported on your credit report leaving your credit score unaffected.

Before I start explaining this option, I highly recommend hiring a tax professional for this, preferably someone who has extensive experience dealing with the IRS.

Offer in Compromise is essentially a contract between the taxpayer and the IRS that settles the liability for an amount less than the original. The taxpayer is usually eligible if unable to pay liability in full or through installments. The liability settlement depends on how much is collectible from the taxpayer. The amount that is collectible from the taxpayer is called the Reasonable Collection Potential or RCP, which is calculated using a formula provided by the IRS. It is also important to note that the formula is not set in stone, and a good tax attorney can negotiate the numbers on your behalf.

In summary, for a client to qualify for an Offer in Compromise, their tax liability must be more than the reasonable collection potential (RCP), which is their Disposable (monthly) Income multiplied by the number of months left on a ten-year collection statute, plus all the equity in their assets. The Disposable Income is calculated by the monthly income minus the allowable monthly expenses as specified by the IRS.

Yes, it does sound complicated, that’s because it is complicated. Again, hiring a tax attorney would be highly recommended in this case. Abajian Law has a team of tax attorneys who specialize in Offer in Compromise cases. They have an impressive track record of resolving outstanding tax liabilities. You can contact Abajian Law at (818) 423-5872.

Currently Not Collectible

This option basically puts a hold on your tax debt problems simply because you can show the IRS that you have no means of paying the taxes owed. You have to show that your income is not enough to cover your expenses, and you have no other assets the IRS can levy. This puts a pause on collections under the IRS hardship rule. Interest will accrue over this period, and you will need to update your financial statements every year. On a positive note, the statute of limitation still applies. If you are still not able to pay the owed amount 10 years after the date your taxes were assessed, then your tax debts just disappear.

Other options not discussed above when dealing with back-taxes include:

  • Chapter 7/Chapter 13 Bankruptcies
  • Innocent Spouse Relief
  • Paying the amounts in full by borrowing money
  • Waiting till the 10-year statute of limitation runs out

The stress associated with dealing with taxes is very real, and sometimes it can be overwhelming. However, as discussed above, you have various options that can help resolve the debt issue. With a little effort and the right kind of help from professionals who understand the tax code, you can overcome this obstacle and move on to a new chapter in your life.

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