Nature of the IRS on Income Tax Debt
The Internal Revenue Service (IRS) understands that its tax payers can have financial difficulties ultimately causing you to go bankrupt. Contrary to the myths and images you might have about the IRS, the government is only interested in getting what it is realistically owed them.
The IRS is really like any other creditor except they are more prone to follow the federal law and guidelines than most when collecting their debts, they can be more reasonable to deal with than most creditors, but they still have unprecedented power to collect debts when the federal law favors them in doing so.
The two primary laws affecting what the IRS will or will not do when it comes to an income tax debt are federal tax law and federal bankruptcy law. Either or both types of federal law can be very complicated for the average taxpayer to understand without professional legal help.
When you get into financial trouble and behind on your income tax debt, expect the IRS to ask for penalties and interest like any other creditor. Like any other creditor who might extend you a loan, the IRS deserves to be paid on time, but when you cannot, the IRS has built into the federal law ways you can pay them based on a fair evaluation of your given circumstances.
Income Tax Debt and Bankruptcy
Federal law allows for income tax debt to be discharged in a bankruptcy filing under certain circumstances within certain guidelines. The tax can be discharged if the tax owed was due more than 3 years in the past, the income tax debt at issue was included in a tax return more than 2 years before the filing of the bankruptcy, the income tax debt was assessed by the taxing authority more than 240 days prior to filing for bankruptcy, and the debtor filing the return must not have attempted to evade paying the tax.
Income Tax Debt and an Offer in Compromise
Before handling an income tax debt through the bankruptcy process, the IRS will also consider an Offer in Compromise. An offer in compromise is a settlement made with the IRS for less than the full amount you owe, and normally requires you to provide evidence to the IRS for a financial hardship in paying the full amount of taxes, penalties, and interest owed.
According to the IRS government website, they give this warning to prospective applicants: “We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time. Explore all other payment options before submitting an offer in compromise. The Offer in Compromise program is not for everyone.”
To be a successful applicant for an offer in compromise, you must meet all the Offer Terms listed in Section8 of IRS Form 656, including filing all required tax returns and making all payments.
Because and offer in compromise is complicated and sensitive in nature, it might be wise to consult with a tax attorney and/or a bankruptcy attorney before making such an offer.
- Can Filing Bankruptcy Settle an IRS Debt and Allow You to Start Over? (betterbankruptcy.com)
- TurboTax – Federal Guidelines for Garnishment (turbotax.intuit.com)
- The IRS debunks 5 popular tax myths (examiner.com)
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