Can I resolve my tax debt if I have past due tax returns?

The short answer is generally, “no”. The IRS requires compliance before you can resolve your tax problems. So what is “compliance”? It isn’t unusual for people who owe back taxes to have several years of unfiled tax returns. When we begin the process of resolving your tax problems, the first step we take is to examine your tax history to determine if you have any delinquent or unfiled tax returns. A review your tax transcript will show us if you filed a return, when it was filed, when the tax was assessed, how much is owed, and other important information. The transcript will also detail for us if the IRS filed a substitute for return (SFR) for you since you did not file a tax return. An SFR is a tax return filed on your behalf by the IRS so they can assess and begin collecting the tax owed from you. Many times, simply filing a tax return can reduce your tax debt as it will replace what is owed by the SFR.

Now that we have reviewed your tax account transcript and determined which tax years you have not filed, how far do you have to go back to be “in compliance”. The IRS requires you to have filed the six most recent years of tax returns to be in compliance. If you have deliquent tax returns that will be our next step in the tax resolution journey.

To help prepare these returns you will need information about your wages/income for each year. Your tax attorney can assit you in obtaining a Wage and Income Transcript from the IRS if you do not have access to these records. These records will provide detail of all income reported to the IRS on your behalf for each tax year.

What is the first step in resolving my tax debt?

When you work with a tax resolution professional or tax attorney the first step towards getting your tax problems solved is to find out where things stand. Once retained, our first step will be to get you to execute a Power of Attorney (IRS Form 2848) which gives us the authority to communicate with the IRS on your behalf. In fact, once that power of attorney is filed with the IRS, they cannot call you directly - they begin speaking with your lawyer.

Once that power of attorney is on file, it allows your tax attorney to request account transcripts for the years you believe you owe. In most situations, we can obtain tax transcripts for the past ten years. Tax transcripts will show information related to your filing status, when your returns were filed (or if a return was filed), what taxes, penalties, and interest are owed for each period, and other information. The transcript will also provide information that helps us to determine what collection statute of limitations (CSOL) is remaining on each tax period you owe. That means, we can help identify how much longer the IRS has to collect the tax debt that you owe.

Once we have gathered your tax transcripts for the periods you owe, we can begin to evaluate your current financial circumstances and strategize for the best way(s) to resolve your tax problems.

What are my options if I owe back taxes to the IRS?

Owing back taxes to the IRS can be stressful. Receiving notices from the IRS in the mail about your past due taxes is scary and most people don’t know where to start to try to resolve the debt. Instead, they may throw the notice in a drawer and pray the IRS goes away. The bad news is that - no matter what kind of administration is in the Whitehouse, the IRS is not going away. The good news is there are several options available to help you address the situation. Here are some common options:

1. Payment Plans (Installment Agreements): You can arrange to pay off your tax debt over time through a monthly payment plan. The IRS offers various types of installment agreements, including streamlined installment agreements for debts under a certain threshold and partial payment installment agreements for those unable to pay the full amount owed.

2. Offer in Compromise (OIC): This program allows taxpayers to settle their tax debt for less than the full amount owed if they meet certain criteria demonstrating financial hardship (it is unlikely the IRS will be able to fully collect the tax debt over the time they are legally allowed to attempt to collect) or doubt as to liability. The IRS will consider your ability to pay, income, expenses, and asset equity when evaluating your offer. Some offers are “lump sum” offers and others are paid over time. Beware of companies that promise to be able to settle your tax debt for “pennies on the dollar”. While it is possible, it is not the norm. Things that appear too good to be true usually are.

3. Currently Not Collectible (CNC) Status: If you're facing financial hardship and cannot afford to pay your tax debt, you may qualify for CNC status. This temporarily suspends IRS collection activities until your financial situation improves. However, interest and penalties may continue to accrue during this time.

4. Penalty Abatement: In certain circumstances, the IRS may waive penalties associated with unpaid taxes. This typically requires demonstrating “reasonable cause”. Reasonable cause means you can demonstrate an acceptable reason to the IRS that your penalties should be reduced or eliminated such as significant medical issues, natural disasters, or reliance on erroneous advice from a tax professional.

5. Bankruptcy: In some cases, tax debts may be dischargeable through bankruptcy, but this depends on various factors, including the type of tax debt and the timing of the bankruptcy filing.

6. Innocent Spouse Relief: If you filed a joint tax return with your spouse and your tax debt is a result of your spouse's actions, you may qualify for innocent spouse relief, which could relieve you of responsibility for the tax debt.