How To Apply For IRS Debt Forgiveness
Few things in popular culture cause as much discomfort as the horror-stories circulated about the IRS. It seems that fake news in the form of urban myths is rife and we thought it a good idea to dispel some of the better known fallacies that masquerade as fact.
You Certainly Will Never Be Allowed to File for Bankruptcy to Escape Your IRS Debt
This would be wrong. Yes you can. Sometimes, after consideration of all the rules and regulations, you can discharge all your personal 1040 tax debts that had been filed when you undergo a Chapter 7 bankruptcy. It will even wipe your slate clean if you have federal tax liens against your property.
Tax Resolution Attorneys Can Magically Help Reduce Your Taxes, Penalties and Interest
Even the best tax attorney cannot perform magic and they cannot by a long shot, reduce everybody’s tax debts. For those among us that can pay their own taxes in full, despite really wanting not to and despite hoping an attorney can save them money, will probably still have to pay all their taxes irrespective.
Despite the fact that there is a penalty abatement program, an onerous program that can take a very long time to come to fruition if at all, there is no interest abatement program at all; the only way to reduce interest is when penalties are abated, the amount of interest outstanding is calculated from the bated amount, which means a lower amount will be payable.
There are, regrettably, many scammers out there. Be especially vigilant when you encounter firms that make outright promises, and who claim that they can reduce your costs in a fixed period of time. The IRS moves in mysterious ways and things take time. Nothing happens fast when you want something from them.
IRS Tax Settlements Are A Myth
The IRS is in one sense like any other corporation that attempts to maximize income; you can certainly negotiate with the IRS, but it is a road less traveled for the man in the street. So it is advisable to bring the professionals in to assist you with the pitfalls and to show you where to tread for the maximum attainable advantage.
When you are considering or interviewing prospective tax specialists, apart from qualifications, be careful of those who follow price as a main strategy, and also for those who provide incredible promises and guarantees as a strategy.
When In Debt, Don’t File Your Tax Returns
Wrong. It is illegal. By not filing you might be sacrificing your chances of filing for a Chapter 7 bankruptcy to get rid of your debts to the IRS and you might hamper your chances of getting to the ten-year statute of limitations mark where the IRS has to write off your total debt.
Do Anything The IRS Asks Of You When They Ask You For It
It is a normal stress response for most people to do anything they can to get away from the IRS and to get the IRS out of their living space and for many the shortest route to freedom is the one where you simply adhere to all the demands and make them disappear.
Though understandable, this is the wrong approach. Most likely, you are just kicking the ball down the road where you will have to pick it up again and again. If you agree to a payment schedule you cannot adhere to, and haven helps, you default on this promised payment schedule the IRS will come at you with a vengeance.
The IRS is not there to help you; they are there to maximize collections; it follows that you are there to help you. So stand your ground – and negotiate the very best deal you can. It is never wise to go heads-on with the IRS without being a master of your own game. Hire a tax professional. It will never hurt your chances.
If I Didn’t Get The Mail I Can’t Fail
The IRS is vehemently uninterested in whether you read your mail or not. They just do not care. The only consequence for you if you refuse to collect or open your mail from the IRS is your own growing ignorance of the perils of your own situation. If you want to waive your rights and maximize your financial woes, refuse to read your mail.
The IRS Filed A Lien Against The House That Is In My Wife’s Name
The IRS exist in a dimension that is in some respects, outside the long arm of the “courts” – so they can file a federal lien against you out of their own accord without the permission of any court; as such they address the lien against any property where you live. However, the lien applies only to property that you own; not to property of third parties. Hence, if your wife does not have tax debts of her own, an IRS tax lien against you over her property does not mean they have a lien over her property.
Pay The IRS If You Want To Stay Out Of The Penitentiary
Poverty is not a crime anymore, and failure to pay the IRS is not a crime. It becomes a crime if you do not file your returns and if you take intentional (fraudulent/extra-legal) steps to make it impossible for the IRS to collect from you.
Without A Court Order, The IRS Can’t Levy My Income Or My Bank Account
If you believe this, things might not work out well for you. It is, of course, untrue. The IRS can levy your wages or bank account as long as they mailed three letters to you – irrespective whether you read it or opened it or not – and as soon as they have mailed letter number three ( Final Notice of Intent to Levy) they have to wait just 30 days, and then they can come for you at will.
The IRS Can’t Touch The Assets That I Gave Away To My Family And Friends
So this might also not work out well for you. The IRS might conclude that you are trying to disperse your assets just to prevent them from collecting from you – and this is a crime and they can just disregard these gifts anyway.
Of course, if your assets were structured legitimately in such a way that no creditor can attach it, but it will be really against your best interest to harm your own chances of reaching a settlement with the IRS.
IRS Debt Forgiveness Cycle
Finding yourself in any sort of debt with the IRS is never a pleasant experience and when it comes to taxes owed to the IRS the situation can get even more complicated. Surely, we all would be happy to ditch paying taxes on our earned income, but this is unlawful and therefore bringing lots of problems for those who chose to disobey the law. Sometimes, however, you might end up in debt not because you deliberately avoided paying taxes, but due to a number of other reasons and circumstances. Either way, if you owe to the IRS, you will have to pay whether voluntarily or through the collection. Today we are going to explain the IRS debt collection process in more detail.
When you do your annual tax return you must be very careful how you fill in all relevant information and are well informed about any laws and rules that can save you money (e.g.deductible costs). Many people who don’t have enough time or knowledge turn to professional CPAs. This is actually a very smart move because it is the first step towards escaping any debts to the IRS at all. Once you have filed your return, the IRS will assess it and check whether you owe any taxes or not. This process may last for 1 to 8 weeks depending on how busy the period when you filed the return is. For example, January is generally calm and your return will be assessed quite quickly, whereas, in April when the peak of tax filing is, it may take almost two months for the return to be processed.
If you are found to owe money to the IRS you will receive a first bill stating how much you need to pay, when is it due and how you can do it. It’s always best to pay your owed tax in full before the due date, but if you can’t you should make at least one payment of however much you can afford at that point. Some penalties and interest charges may apply until your debt is fully cleared. You are not required to set up installments agreement, but that might be a good idea to minimize the above-mentioned charges. IRS has made it very easy to make payments to them, so you can use almost any method including online. Whatever works best for you. Also, you have the option to disagree with the decision of the IRS on your first bill and appeal it. This will delay the collection process until a final decision is made.
If you don’t appeal the decision on your first bill and fail to make any payment on your due taxes within the set deadline, you will be sent another bill approximately 2-3 months after.
Again, you will be asked to pay in full or at least make any payment of an amount that is currently affordable to you. In some cases, you may receive a third bill after you failed to respond to the first two, but most likely your account will be flagged for debt collection after the deadline on the second bill has past and you haven’t made any payments or appealed the IRS decision.
Notice of Federal Tax Lien (NFTL)
If you haven’t paid or at least started to pay your debt after all the correspondence the IRS has been sending you in the course of 3 to 6 months, a notice of federal tax lien will be issued to your name. This is a public notice to creditors that the IRS has an interest in your current and future property like your house or car. NFTL is not something you want to have on your record, not only because it will majorly hinder your chances of getting any loan or entering a financial agreement, but also because it is really hard to get rid of it even after you’ve paid your debt in full. For more information on how you can clear your name off NFTL, read our recent post titled How to Get Rid of IRS Tax Lien. If you get an NFTL you should aim to pay your debt in full within the deadline set on the notice or if you can’t, at least you should make arrangements for several payments over a period of time.
If you ignored the IRS previous correspondence and failed to pay your debt either in full or partly even after getting a Notice of Federal Tax Lien, you will get another letter containing a CP-504 notice. Essentially this is a notice of seizure or levy on your federal tax refund or other sorts of assets, which value can cover the amount due to the IRS. In addition, you are also notified that you may lose the right to be issued a U.S. passport if you are planning to apply for one or your passport can be revoked if you have already obtained it. Points of action for you at that moment are pretty much the same as the options you had before: pay your debt in full or make arrangements for regular payments over time.
You will get one final letter before an actual collection of your assets begins. This is letter 1058 or notice of intent to levy and right to a hearing. You will have 30 days from the date of the letter to pay or start paying your debt or request an appeal hearing. Failure to do any of these will result in seizure of your real estate property, cars, bank accounts and business assets.Owing money to the IRS is not something to joke with. The debt collection cycle has been made flexible enough to help individuals in different circumstances keep up with their due payments. Ignoring formal correspondence and failing to pay what you owe with appealing the IRS decision can result in seizure of your property and put a long-lasting stain on your reputation.
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How to Qualify for IRS Tax Debt Forgiveness
If you have tried every available option for delaying or extending the payment and minimizing the amount of your taxed due, but you still find yourself unable to settle your debt to the IRS, there’s one last step you could take. You can apply for your tax account to be declared Currently Non-Collectible (CNC), which means the IRS will drop any debt collection procedures against you for the time being. It may sound like an appealing solution to get away with paying the tax you owe, but in reality, there are many underwater rocks you need to be aware of. Keep reading below.
What is Currently Non-Collectible Status
CNC status means that after you have declared and sold all your assets, you are still in no position to pay your debt whether in one go or in installments. Essentially, it is granted to people who would be in serious financial hardship if they had to make payments to the IRS to cover outstanding debt and that would affect their ability to pay for vital needs like accommodation, food, utility bills and basic clothing.
How Can You Qualify for CNC?
Some of the most common scenarios in which you are likely to qualify for CNC are if:
- You are unemployed.
- You have a fixed income and little to none of it is residual.
- You have a health condition that does not allow you to work.
The IRS uses specific methods in which they calculate the amount of money you are allowed on expenses against your tax liability. If both collectible assets and residual income equal $0 or less, the taxpayer is eligible for CNC status.
A person can also fall into CNC if:
- The IRS is unable to locate the taxpayer’s assets.
- The IRS is unable to contact the taxpayer.
- The taxpayer passes away with no significant assets left behind.
- The taxpayer declares bankruptcy or their business gets suspended with no remaining assets.
- If the taxpayer is part of the military personnel, serving in a war zone.
Why Should You Apply for CNC?
There are some circumstances in which applying for CNC would be a good idea as it would help a taxpayer who is in a really bad tax debt to have some time to get back on their feet. If you have tried to apply for Offer in compromise and Installment Agreement and the settlement offer or the monthly payment amount would put you in serious financial hardship, then it is best to try obtaining a Currently Non Collectible status. It’s a good method to get out of debt if:
- Your 10-year statute of limitation period is about to expire.
- You earn less than $84,000 a year and your expenses fall in line with the IRS guidelines.
- Your income comes from welfare benefits, unemployment benefits or Social Security benefits.
- You are unemployed and have no other source of income.
What You Should Know about CNC?
As much as it sounds like a blessing for someone who is really stressed about their financial situation, being put on a Currently Non Collectible status has its downsides. First of all, you must be prepared to provide full financial information. This includes bank statements, list of assets and their market value, proof of income and expenses, as well as evidence of paying for any significant medical procedure that you may have had to undergo. Secondly, even if you are granted CNC status, your tax lien will not be removed and the penalties and interests will continue to grow on your account. Thirdly, but very importantly, the CNC status is not permanent. It is usually given for a year at a time and it could be removed with every change of circumstance on your annual review when your tax return is filed.
How to Apply for CNC?
First and foremost, as every other application for IRS tax debt relieving options, you must make sure that you have filed all your returns up to date. Also, you need to prepare all required documents, which will determine whether you are eligible and will be the turning point of your application outcome.
After you’ve ensured you are current on your returns and have collected all necessary documentation, you will have to file Form 433-A/F, Collection Information Statement. In addition, you will be required to submit supporting documents to your claim. Some of the information the form asks for includes:
A full list of all your assets (vehicles, real estate, life insurance, bank accounts, investments, etc.)
- Proof of the market value of these assets
- Proof of income in the last 3 months
- Proof of expenses in the last 3 months
Usually, you should be able to fill in the form yourself without much trouble, but it is advisable to see a CPA or a tax advisor so that they can go over it before you submit. Also, a professional would be able to advise you is this is the right option for your particular situation after analyzing your circumstances. You could try assessing this yourself as well by using the IRS Financial Analysis Handbook, published in the Internal Revenue Manual.
After you’ve done all of the above and you are confident this is the best solution to your current tax debt, you need to call the IRS and start the application process. It will be quite a lengthy call and you must have all the documentation we mentioned in handy. Often times you will be told at the end of the conversation whether you qualify or not, but in some cases, you may be required to submit some follow-up items.
Who Can Grant CNC at the IRS?
Various types of bodies can grant CNC such as:
- Service Center
- Automated Collection Systems
- Revenue Officers,
- Group Managers
- Appeals Officers
- Settlement Officers
If you don’t qualify for Currently Non Collectible status do not despair. Instead, contact a good CPA and ask what other options may be available to you that will correspond most appropriately to your current financial situation.
Does Tax Debt Expire?
Technically, yes. The IRS needs to collect tax debts within 10 years of the assessment. After that period if the person was unemployed or in serious financial hardship and couldn’t make the payments, the debt collection expires. We have to note, though, that extremely few cases actually get to this point and conclude with a happy end for the taxpayer. Ten years is a long time and in most instances people experience various changes. They may also choose to enter IRS debt relief programs or are issued with a levy. Our advice would be don’t try to wait your tax debt out. It almost certainly won’t work.
How to Settle Your Tax Debt?
Here is a quick view of your options:
You can apply for Currently non-collectible status. To qualify you will have to be unemployed or underemployed and prove that you can’t make the required payment. This options only freezes the collection on your account, but does not forgive your owed taxes forever. The IRS will continue to monitor your account and whenever you get a new job or enter a better financial position, they will renew the collection process.
You can minimize what you owe with an Offer in Compromise. With this program, you can negotiate with the IRS and settle for a tax amount that you can afford to pay.
The third avenue you may choose to walk on is filing for Chapter 13 bankruptcy. This means you will enter in an installment agreement with the IRS for the period of 60 months. The monthly amount of repayment will also be negotiated after a review of your financial situation. After this period runs out, no further tax will be collected even if there is still outstanding balance.
Probably the most favored IRS debt resolution program is called Fresh Start. It requires filing for Chapter 7 bankruptcy. Then some of your taxes will be completely wiped out.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
If you are currently dealing with IRS debt, be sure to contact us and discuss which debt resolution option would be most beneficial for your present situation and future goals and opportunities.
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