Many individuals struggle to meet their basic living expenses. As a result, some obligations get pushed aside, often out of necessity.
For many, IRS debt may unfortunately fall into that category. Individuals reduce their federal tax withholdings so that they are able to take home increased pay. Or perhaps a person takes a needed early withdrawal from a retirement account, and fails to have taxes withheld or does not set anything aside to cover the 10% early withdrawal penalty.
As a result, they are faced with a large tax bill that they cannot pay off in full.
For those that are self-employed, it becomes even more difficult to make estimated tax payments and set aside funds to cover your year end taxes. When faced with paying the bills verse paying estimated tax, some feel they must opt for the former.
The IRS recognizes the hardships that individuals find themselves in. They work hard to educate taxpayers regarding their tax obligations, how they can identify and correct the reasons they owe, and how to resolve existing balances.
One thing is for sure – The IRS cannot help you if you ignore their repeated attempts to make contact. In fact, that will only lead to possible enforcement actions and mounting penalties and interest.
It is your responsibility to contact the IRS regarding any delinquent tax matter. Don’t wait for the IRS to send you a notice. If you are filing a return with a balance that you cannot pay off in full, then you should send in your return with Form 9465, Installment Agreement Request.
There are many other payment options available, and for those with very large or unmanageable debt, the IRS Offer in Compromise program may be available.
If you cannot pay anything at all, then there are options that the IRS can extend to you as well.
If you meet certain criteria, the IRS can input your balance due account into a Currently not Collectible status.
Under the terms of this arrangement, the attempt to collect on your debt will be temporarily held in abeyance until your financial situation improves. This resolution is especially appealing to those who are temporarily out of work or are only on a fixed income.
Depending on the amount owed, the IRS will need to verify the hardship by taking a financial statement. They will compare your income, if any, to your necessary living expenses and monthly bills. You may be asked to substantiate certain items, such as a drop in income, or certain expenditures such as high medical costs or court ordered repayments. Expenses that are considered non-essential or superfluous will not be considered in lieu of your federal tax debt.
If the results of the analysis demonstrate that your necessary expenses leave no funds left over to pay your taxes, then the IRS may grant you the non-collectible status.
This does not mean that your balance ‘disappears.’ Penalty and interest will continue to accrue; for this reason, the IRS will ask that you make voluntary payments, as you are able. An annual reminder notice will be sent, but no other attempts to collect the debt will occur, outside of your federal and state tax refunds which will continue to be offset against your debt.
Any continuous levies, such as garnishments that may be on your pay or Social Security benefits, will also be released.
However, before the IRS will consider this, you must be current in the filing of all your federal tax returns. The IRS will not agree to withhold collection efforts if you are not in compliance with your filing obligations.
Once you have been approved for the non-collectible status, if your financial situation improves, the IRS will expect that you contact them to make formal payment arrangements. Failure to contact the IRS in that situation would lead to a reversal of the non-collectible status and a reactivation of your balance into collection.