How to Reach the Goal of Tax Debt Forgiveness?
So many things seem to have changed from our grandparents’ generation to our parents, and from our parents’ generation to now. Politics, the job market, the role of education, what a “typical family” looks like, how we communicate, how we entertain ourselves, and even what we eat most days – it all feels so different even from decade to decade.
I like to pay taxes. With them, I buy civilization.
Do you realize that only fifteen years ago, most of us didn’t have a Facebook account or even know exactly what “social media” was? It was only about thirty years ago that most of us didn’t have cell phones (or if we did, they were the size of a football and probably hard-wired to our car)? Forty-five years ago, it would have been pretty strange to see someone running outside unless they were being chased or they were training to fight Ivan Drago.
There are a few things that haven’t changed much, however. Relationships are still complicated sometimes – women are hard to figure out and men are stubborn and clueless. Teenagers still want to prove their individuality by dressing and acting just like other teenagers. And the IRS still comes with its own ominous soundtrack in the back of our minds – heavy on the minor chords and low brass. Darth Vader’s “Imperial March” is a chipper little sing-along compared to what we feel when we think about Uncle Sam with his glasses on and an adding machine in his hands.
It’s great to get tax refunds every now and then, within reason. But what about when we discover we owe the I.R.S. money? Maybe more than we can pay? What do you do when you’re not sure how you’ll ever come up with the cash to satisfy that balance on your 1040? Is the government ever, you know… nice? Is there such a thing as tax debt forgiveness?
Tax Debt Forgiveness and Other Solutions
We should say up front that it’s fairly unusual for the IRS to simply wipe out your tax debt completely and send you on your way. What’s no uncommon, however, is for the IRS to consider reducing your tax debt or offering you extended payment opportunities. This is especially true as the IRS has ironically fallen victim to the same sorts of budget cuts as many other organizations.
To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.
As a result, the number of audits has fallen dramatically in recent years. And the Internal Revenue Service has ended up disproportionately focused on low-income taxpayers who are less able to defend themselves or afford extended battles. That means anyone willing to take the initiative to resolve their tax debt has a better chance of coming to terms with the agency. Particularly if they can do so via standardized forms and automated responses to minimize the actual man-hours required at their end.
In other words, there’s some paperwork involved, but generally, the IRS would much rather figure out how to help you pay some or all of what you owe than take your house, kick your dog, and throw you into a big cartoon dungeon somewhere guarded by a colossus with a battle axe.
If you owe taxes of less than $50,000, have an individual income of less than $100,000 annually or a married income of less than $200,000, or if you’re self-employed and have seen your income drop 25% or more in the past year, you may qualify for some form of tax debt forgiveness or reduction.
The Fresh Start Program (A Suite of Tax Debt Forgiveness Options)
The “Fresh Start” initiative is actually a collective title given to several different tax debt management options. All require you to be current with your tax returns, meaning that you’ve completed a 1040 and any related tax forms for every year up through the current one. They’ll also check to verify that your withholding through your employer has been correctly managed – there’s no skimping on what your job sets aside for taxes other than claiming hardship when you can’t afford to pay the difference.
Like any tax paperwork, you can theoretically file all the paperwork yourself. Given that you’re already in tax trouble, however, it’s probably worth looking for a tax professional in your area who specializes in this sort of thing. AVOID ANYONE MAKING BIG PROMISES OR UNREALISTIC CLAIMS about what you can save or how much debt they “guarantee” they can make vanish. Start with local community organizations and ask about options that take into account your financial situation.
Within the “Fresh Start” program are several options.
Offer In Compromise (OIC)
This option offers potential tax debt forgiveness, at least in part. If you can demonstrate that paying the full amount you owe the IRS is simply impossible under any arrangement or that doing so would create severe hardship, you may be able to offer a lower payoff amount and have the remaining balance canceled.
You can apply for this option online through the official IRS website. Not surprisingly, there’s more paperwork involved than a simple request for payment arrangements. You’ll need to be able to document your current income, existing assets and liabilities, outstanding debts, and other relevant information. Essentially, you’re looking for a number that allows the IRS to still collect a reasonable amount from you without bankrupting you or leaving you destitute. They don’t want to expend the energy it requires to prosecute you if they can avoid it, but neither do they want to make it easy to simply not pay all you owe.
As with the other options, it’s essential you be current with your tax returns and haven’t skipped any required estimated payments. This is yet another reason it’s best to pursue your options as soon as you realize you’re having difficulty rather than waiting until you see no other way out.
You must submit an initial payment of 20% of whatever total you’re suggesting and make the remaining payments in no more than five regular payments. This requirement and the token application fees may be waived if you qualify as “Low Income” – which is yet another form. But hey, compared to living in a box under a bridge, what’s one more page to fill out?
Meet Taxry. Find the Best Priced Tax Management Software.
Currently Not Collectible (CNC)
“Currently Not Collectible” is the closest official IRS program for actual tax debt forgiveness. This one isn’t nearly as easy to find on the IRS website and once there the instructions almost seem to have been written with a scowl.
Individuals are asked to complete a Form 433-F, or if you’re self-employed, a Form 433-A. Small businesses apply for CNC status through the 433-B. To qualify, you must be able to demonstrate that you simply have nothing left over after meeting essential living expenses each month – hence the extensive paperwork. Unlike your other options, less than half of CNC applications submitted each year are approved.
Even under CNC guidelines, however, your balance is deferred rather than automatically canceled. If approved, you’ll be shielded from the IRS garnishing your wages or grabbing money directly from your checking account, but the plan is once you can afford to pay, you will. In the meantime, interest and penalties still accrue. This one may also be reported to creditors as notice that if you do turn out to have anything of value at some point, the IRS has first dibs.
Innocent Spouse Relief
This one can get messy. Then again, if you’re considering this option, things are probably already messy.
If you’ve filed jointly with your spouse – or former spouse – and then discovered they either seriously messed up the return or they lied about something and you didn’t know, you may be able to avoid some or all of the responsibility for the resulting penalties and interest. This doesn’t necessarily require that you be separated or divorced in the intervening time period, but many of the provisions assume that perhaps things weren’t going great in the relationship department at the time.
There are variations like “separation of liability relief” and “equitable relief” which we won’t go into here because they’re so specific. The good news (if you can call it that) is that they all start with the same paperwork – IRS Form 8857. However, if you think this might apply to you you should begin with a thrilling little document called IRS Publication 971: Innocent Spouse Relief. It’s not the most exciting reading you’ll ever do, but it’s surprisingly helpful in breaking down what you can and can’t ask for in all sorts of situations.
If you’re in need of tax debt relief or believe you’re owed a refund you’re not getting due to the actions of a spouse or former spouse, however, please know it’s worth looking into your options with the IRS. It may seem like you have bigger things to worry about, but as we often point out around here… money isn’t everything. It’s not even the most important thing. It does, however, have a way of substantially impacting almost everything else that is important. That’s why it’s best to pay attention to the money stuff before, during, and after everything else.
The Absolute Best Tax Debt Help Ever
There’s actually an even better way to deal with almost any type of tax trouble in whatever form it may take:
Stay out of tax trouble.
I know, easy – right?
Here’s what I mean. Most tax problems with the IRS begin in one of two ways. Either we misunderstand a form or figure or we forget to do something, or we try to cut corners and we fudge a bit on our withholding, deductions, or other important numbers. It’s not inconceivable that some completely unforeseeable tax nightmare might blindside you out of nowhere, but it’s actually rather unlikely.
If you don’t like how many taxes you’re paying, take it up with your elected representatives. Get involved. Vote. Volunteer. Write informed letters. Share valid, researched information politely on social media. If the numbers justify it, hire a professional to help you take every possible LEGAL avenue to reduce your tax burden. Work the system if you must – but don’t try to cheat it.
WHY?
Well, first of all, it’s wrong. Yes, I know lots of people with WAY more money than you and I cheat the system all the time and get away with it. But come now, we’re not children. We don’t really believe that makes it OK for us to do the same thing, do we?
Perhaps just as importantly, chances are very good you’ll get caught. If not immediately, then eventually. And when you are, the consequences are severe. You’ve probably read enough articles on human psychology to know that we all think we’re the one person clever enough to get away with pretty much anything – infidelity, cheating our employer, driving after too many drinks, etc. Hopefully, you’ve read enough far enough in each of those articles to also realize that we’re not.
Besides, you don’t have to cheat to stay out of tax trouble. You have to plan. You have to pay attention.
Payment Plans
This is not tax debt forgiveness, of course, although it’s often included as one of the options under that general heading. Payment plans allow you to pay what you owe the IRS over time – usually a period somewhere between 12 – 72 months.
You can apply for this option online through the official IRS website. Acceptance or approval is usually quite prompt. You must owe $50,000 or less to secure terms longer than six months and be prepared with all the usual information to complete the application. There’s no set-up fee for most variations within this option, but keep in mind that interest and penalties will be added along the way. You’re still paying “late” with this method, but by making arrangements with the IRS instead of simply not paying, you avoid the danger of having property seized or legal action taken. Essentially, you’ll pay for the extended time just like you would with a high-interest credit card.
Setting Your Tax Management Goals
Think of your tax obligations – in all their forms – as any other expense. Like utilities, groceries, rent, vacations, entertainment, or anything else, you’re probably going to have to pay something. You can’t change that. What you can change is how you pay it, and to some extent how much you pay.
Start with the simple things. Make sure you’ve selected an appropriate withholding amount with your employer. If you’re self-employed, be realistic about how much you need to set aside in a separate savings account each and every time you get paid from a job. Don’t tell yourself you’ll make it up next month when things pick up – do it now, this time. Take 30 – 45 minutes once or twice a week to read the Taxry blogs and other reputable sites advising you on ways to reduce your tax burden and make better tax-related choices. Knowledge is power, and the number one reason people miss out on refunds or pay more than they have to is a lack of sufficient knowledge about the system. We mentioned a savings account, so if you decide to open one, here suggestions for you:
Where do you find the time? The same place you find the time to earn your money in the first place or cook dinner at home instead of eating out every night. Or mowing your own lawn instead of paying someone else or anything else – you make the time because it matters. Money isn’t everything. It’s not even the most important thing. But it impacts almost everything that is important to us.
Practical Help With Your Tax Management Goals
We’re in the process of releasing a freshly re-imagined personal unified finance app which we believe could be a game-changer for thousands of individuals and small business owners. I’ve written about it before so I’ll skip the usual cheerleading here, but suffice it to say that among its many features comes help to determine if you need professional tax help (and if so, help you compare the best options in your area). If you’re doing your personal or small business taxes yourself, it can help you choose the right tax software for you and find it at the best price. Perhaps most importantly, it should make managing your budgeting, spending, and record-keeping more efficient and accurate throughout the year, dramatically reducing the stresses of tax time and reducing any chances of error or omission.
Final Thoughts
No one likes taxes. They are, however, a fact of modern American life. As long as that’s the case, the best we can do is to manage them as effectively and efficiently as possible. We can’t make it pleasant, but it doesn’t have to be as hard as it sometimes seems – and you don’t have to do it alone.
Let us know how we can help.