If you have serious income tax debt, you have 5 ways to deal with it:
1. Challenge the Assessment
Challenge the amount of the tax by filing correct returns, amending returns, appealing the audit results, litigating the audit results etc.
2. Statute of Limitations Defense
The IRS has a limited period of time to collect debt. If it doesn’t collect within this period, it is generally, out of luck. Many taxpayers are able to use this to their advantage, especially in combination with non collectible status or installment agreement arrangements.
3. Installment Agreement/Non Collectible Status
The IRS must typically allow a taxpayer to set up a monthly payment on what is owed if the taxpayer will comply with a few requirements. The amount paid does not have to be enough to pay the tax debt off within the statute of limitations period. In fact, the amount paid monthly may be nothing. It all depends on the taxpayers ability to pay. This number is based on how much the government will agree that you need to live on, subtracted from your income. Assets are taken into account as well.
These programs are used to pay the debt in full over time, OR to get the taxpayer to the statute period mentioned above. In our office, they are also often used to buy time until the tax debt can be considered “dischargeable” or can be wiped away in bankruptcy.
4. Offer in Compromise
The “grand slam” of tax defense is the Offer in Compromise or “OIC” for short. The OIC if successful, will create a forced settlement of the tax debt for an amount based on the taxpayer’s “reasonable collection potential”.
If the taxpayer meets some stringent criteria and has very few other debt problems, then the OIC is the best choice. Most people with serious tax debt, don’t qualify, as they make “too much” money, (The average acceptance rate is typically less then 20% of offers filed) AND OR they have substantial other debt.
As a result of the inability to use an offer in compromise or because of substantial other debt, or both, many find that a bankruptcy is actually the best option.
A well planned bankruptcy MAY also aid an OIC as the IRS is supposed to at least consider the effect of the potential bankruptcy on the collectibility of the tax debt.
Unfortunately, many “tax professionals” fail to take bankruptcy into account when considering the taxpayer’s best options. It doesn’t fit their business model in the short term.
I have been able to help clients deal with literally millions of dollars in tax debts via the use of the bankruptcy code.
If you have significant tax debt, you will want to at least consider it.