Being in debt can be overwhelming, but owing the IRS money can be especially stressful. However, falling into tax debt is not uncommon. According to Business Insider, the average tax debt nationwide in 2018 was $16,849. The most common cause for tax debt was owing more than expected along with back tax penalties, unfiled taxes, and divorce.
With tax season upon us, it’s important to understand what tax debt is, how to resolve it, and how declaring bankruptcy can provide relief.
What is tax debt?
Tax debt is simply the difference between taxes owed and paid. When you forget to pay or file your taxes, when there is a mistake on your taxes, or when the IRS wants to change your taxes and you owe money as a result, you’ve incurred tax debt.=
Tax debt can get out of control if not handled quickly and properly. The IRS charges penalties and interest on outstanding balances on a monthly basis. It can take more serious measures, like imposing levies and liens, if the debt is not addressed.
How to resolve tax debt
The first and most important step to take is to address your situation. The IRS won’t ignore the problem and neither should you. Because this year’s tax deadline has been extended to July 15, 2020, you still have time to avoid tax debt by filing for an extension until October 15, 2020.
If you don’t file your return or make any payment on your obligation, your tax debt will grow rapidly. File your return on time or file for an extension. The late filing penalty is 5 percent of the tax owed per month up to a maximum of 25 percent of the balance. The underpayment penalty is 0.5 percent to 1 percent per month of the balance.
Once you have addressed your situation realistically, consider an installment plan to pay off your debt within three years. Your specific tax situation will determine which payment options are available to you. If this option is not feasible for you, you may be able to qualify for an offer in compromise, which allows you to settle your tax debt for less than the full amount you owe. The IRS will consider your ability to pay, income, expenses, and asset equity to determine your ability to pay your full tax liability or if doing so creates a financial hardship.
Another solution is to request a “currently not collectible status” from the IRS. In this situation, the IRS will temporarily suspend levies, threatening letters, and collection enforcement until your current situation improves. If applicable, you can also request “innocent/injured spouse relief.”
If none of the above solutions work for you, declaring bankruptcy may provide the tax debt relief you are seeking.
How declaring bankruptcy can provide tax debt relief
In some situations, declaring bankruptcy can help you develop a payment plan within your bankruptcy case to pay back a certain portion of your tax claim. Filing for Chapter 13 bankruptcy allows you to develop a plan to repay a certain amount of your tax liabilities and stop the harassing collections actions that are being done by the tax agencies. Discharging tax debt completely in bankruptcy is very difficult, but Chapter 13 will allow you to pay a certain portion of it back so that your liability can be significantly reduced once you are out of your bankruptcy plan.
The rules for discharging tax debt are unclear and can be complicated. Here are a few things to know:
- Payroll taxes or fraud penalties can never be eliminated in bankruptcy.
- If you filed a fraudulent tax return or attempted to evade paying taxes, bankruptcy won’t help.
- The tax debt must be at least 3 years old to be eliminated by bankruptcy.
- You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy
- The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
Because bankruptcy and tax laws can be complicated, it’s important that you consult an attorney when dealing with tax debt and filing for bankruptcy.
Tolar & Tolar Attorneys at Law are here to help
Are you interested in filing for Chapter 13 bankruptcy to obtain relief from tax debt? The attorneys at Tolar & Tolar are here to help you navigate the process. Bankruptcy is not a do-it-yourself process, and a misstep can cause your entire case to be thrown out, impact the amount of debt that is dismissed, or cause you to lose certain assets to the court that you were wanting to save. At Tolar & Tolar Attorneys at Law, we believe you shouldn’t have to go at it alone, and we dedicate ourselves to making sure you get a fair shake and can keep as much of your life together as possible. Our goal is to give you a new and brighter economic outlook.
Let our family help your family! Contact us today to set up your free consultation!