This is the fourth in a series of articles from NCLC that provide advice for families in financial difficulty. (The other articles are Dealing with Medical Debt, A Reverse Mortgage Primer, and Motor Vehicle Repossessions.) The Consumer Debt Advice series is targeted directly to a consumer audience and includes information about legal rights and best strategies for dealing with debt. Readers are encouraged to share these articles with individuals who may benefit—clients, counselors, community groups, clergy, and others. Use the “email” icon at the top of this screen to reach your networks directly.
This article also outlines consumer rights and options when a consumer is having difficulty paying the IRS for federal income taxes that are past due:
- Why you should always file your tax return even if you are unable to pay the taxes that are due.
- Three options to reduce or pay your tax debt over time.
- Whether a spouse is obligated on taxes the other spouse owes.
The article also outlines steps the IRS takes to enforce tax debt, the implications of the taxpayer’s bankruptcy filing, and where to seek help dealing with the IRS. NCLC’s Collection Actions is a comprehensive legal treatise examining more generally enforcement of different types of debt, including a chapter on enforcement of debts owed to the federal government.
You must give special consideration to your federal income tax obligations. If you can afford to pay the outstanding tax bill, you should do so in order to avoid accruing further interest and penalties. When you owe taxes to the Internal Revenue Service (IRS), the IRS will not ignore this debt, but instead, the IRS will press collection and seek penalties and interest. Outstanding federal taxes may be collected for ten years from the date assessed—a debt to the IRS can have a long life. The IRS also has far reaching authority to collect taxes—it can place a lien on property and levy (seize) property including bank accounts, wages, Social Security, and even pension payments.
File the Return on Time Even if You Do Not Pay the Taxes Owed
One of the worst things you can do if you cannot afford to pay your taxes is to not file your tax return. You must file an income tax return, in general, if you are a U.S. citizen or resident alien, and your taxable income exceeds certain amounts.
For the tax year 2018 (taxes due April 15, 2019), you have to file your return if:
- • You are single and your taxable income exceeds $12,000.
- • You are the head of a household and your taxable income exceeds $18,000.
- • You are joint filers and your taxable income exceeds $24,000.
- • You are self-employed and earn over $400.
These dollar amounts go up each year.
April 15th is the deadline for most people to file individual income tax returns and pay any taxes owed. Filing extensions are available, but this does not extend your time to pay.
If you fail to file either an extension or your tax returns by April 15, and you owe taxes, the IRS will prepare a proposed tax return, called a “substitute for return,” which shows how much the IRS thinks you owe. You can dispute that determination by responding to the letter or filing a late return.
If you file late, the IRS will assess a late-filing penalty. If you owe taxes and are late in filing by sixty days, the penalty for late-filing is 5% of the taxes owed for each month or part of a month that your return is late, with a maximum penalty of up to 25% of the taxes owed. If your return is over sixty days late, the minimum penalty is the smaller of $135 or 100% of the tax owed.
Totally separate from any fee for filing late is the late-payment penalty. If you pay late, the IRS will assess a late-payment penalty. The penalty for late-payment is only a fraction of the larger penalty for not filing a return—it starts at only one half of 1% of the tax owed for each month late, up to a maximum of 25% of the taxes owed. You will also be assessed interest on the unpaid tax and penalty.
Getting an extension to file is also not the solution it might seem to be. Although the IRS will automatically give you a six-month extension if you request it with payment of the taxes you are likely to owe, keep in mind that this is only an extension of time to file. It does not give you more time to pay the taxes you owe, and you will be charged both interest and probably a late-payment penalty during the time of the extension if you have not paid in full by April 15. As noted above, if you can’t pay the taxes due, it is a better idea to file the return, pay as much as you can, if anything, and then consider negotiating a payment option with the IRS (discussed below).
Options for Paying Tax Debt
If you cannot afford to pay your taxes, the solution is not to put the taxes on your credit card which you also will have trouble repaying. As described below, the IRS will give you a better deal than putting the tax payment on your credit card. Interest rates will be lower, there will not be a processing fee to pay, and you may even get the IRS to reduce your obligation.
When you file a return but cannot afford to pay the taxes due, you will generally have three options in dealing with the IRS:
- • Enter into a monthly installment agreement;
- • Negotiate for a smaller tax bill by seeking an “offer-in-compromise”; or
- • Request a hardship determination, called “currently not collectible” status.
All of these options require IRS approval, although the IRS allows almost every taxpayer that owes less than $50,000 to enter into an installment agreement through a streamlined process available on their website. If IRS does not grant approval for any one of the three options, you then have the right to seek an appeal or ask for a review of your case. These actions often require you to submit IRS forms, that are available at www.irs.gov.
The Installment Agreement. The IRS allows you to pay taxes you owe in monthly installments over a period of up to six years. The IRS imposes a “user fee” of $149 ($43 for low-income taxpayers) to set up an installment agreement, the fee is reduced to $31 if you set up the agreement through the IRS website and you agree to pay using direct debit from your bank account.
Penalties and interest will continue to accrue until the balance is paid in full. The interest rate will be the federal short-term rate (presently a little over 1%) plus 3%, which is a lower rate than most rates for unsecured loans and credit cards. If you have an installment plan, the penalty for late payment is only one-quarter of 1% for each month. The IRS will waive penalties if you qualify under its First Time Penalty Abatement policy, or if you have a valid reason for your late payment or late filing. Use a Form 843 to request penalty abatement.
If you owe less than $50,000 and have already filed your return, you can complete an online application at the IRS website to apply for a monthly payment plan. You can also file IRS Form 9465: Installment Agreement Request, which you can mail in or attach to your return if you haven’t filed it yet. You may also call the IRS at the phone number on your bill or notice. Be sure to ask for written confirmation of the installment plan you negotiated. The IRS charges a higher fee for requesting an installment agreement by mail (Form 9465) or by phone.
Generally, if you owe less than $25,000 and your installment agreement will fully pay the debt in six years or less, the IRS will not file lien against you. The IRS cannot execute a levy while the installment plan is in effect. (See “Steps the IRS Can Take to Force Payment,” below.)
Offer-in-Compromise. The IRS may accept payment for less than what you actually owe through its “offer-in-compromise” program. Reduced payment is permitted when the IRS determines that, under established financial guidelines, the taxpayer cannot afford to pay the full amount of taxes owed or where an exceptional circumstance exists such that collection of the tax would create an economic hardship or would be unfair and inequitable, (i.e., the assets that could be used to pay the tax debt are needed to pay for the long-term care of a seriously ill person).
There are special IRS forms you must fill out to request an “offer-in-compromise” (Form 656 and Form 433-A). You will also need to pay an application or “user” fee (presently $186) plus make a first payment of 20% of your offer amount (or the first payment of a proposed payment plan), unless your income is below a certain amount and you complete Form 656-A. Generally, an offer will only be accepted when the amount offered equals or exceeds your net equity in assets, plus your ability to make installment payments from future income.
It takes about six to twelve months for the IRS to review an offer-in-compromise. During that period, you will not be expected to make any payments on your tax debt. However, interest and penalties will continue to add up, so if your offer-in-compromise is rejected, you tax bill will grow during the time the IRS has your offer-in-compromise under review.
Non-Collectible Status. You may be eligible for a temporary hardship determination from the IRS, called “currently not collectible” (CNC) status. The IRS will only grant you this status if you do not have any assets you could use to pay your tax debt and you do not have any income left after “allowable expenses.”
Allowable expense are listed on the IRS website (use the search box to find, “Collection Financial Standards”) and are used by the IRS to determine allowable monthly living expenses. If your monthly income is less than the allowable living expenses, you will be eligible for the non-collectible status and the IRS will put your account on hold.
CNC status is not permanent, and does not mean the tax debt is forgiven or reduced. This status can change if your financial circumstances improve, if you file another return with a balance due, or if you do not file a tax return when you are required to do so. The IRS will monitor your tax returns and remove the hardship status if your returns suggest a significant financial improvement. Also, interest and penalties will continue to add up during this time.
To apply for CNC status, you should call the IRS at 800-829-7650 and specifically ask to be placed into “currently non-collectible status.” If you do not ask for the status, the agent will generally ask you to set up a payment plan. When you ask for non-collectible status, the agent may send a Form 433-F: Collection Information Statement, for you to fill out, but in most cases, the agent will simply ask you questions in order to gather the relevant information to make the “currently not collectible” determination during the phone call.
If the IRS grants CNC status, it may file a lien with the county recorder’s office (or similar agency) if you owe more than $10,000 even if you do not own any property. Generally, the lien will not appear on your credit report.
In certain limited cases, your responsibility to pay a tax may be cancelled when the tax is owed entirely by your spouse or ex-spouse. This cancellation may be available when your spouse or ex-spouse was solely responsible for failure to pay the taxes, the taxes are entirely attributable to your spouse’s separate business, or if you were the victim of domestic abuse. This is true even if you filed a joint return. If you believe you are entitled to the IRS’s “innocent spouse relief,” you can file a Form 8857, but help from a tax professional is recommended. Resources for getting help are listed at the end of this article.
Steps the IRS Can Take to Force Payment
If you do not set up a payment plan, negotiate an offer-of-compromise, or secure “currently not collectible status,” the IRS can force payment. Before the IRS actually forces payment, it will generally send you a series of threatening letters, for instance a Notice of Tax Due and Demand for Payment or Final Notice of Intent to Levy.
These notices inform you that the IRS intends to seize or “levy” your property. The IRS can take any or all of your property, such as bank accounts, paychecks, and even homes, with the exception of certain exempt types of income and possessions.
Part of your wages are protected from being seized by the IRS—they are exempt from levy. A single filer can protect $230 per week, while a married couple filing jointly can protect $461.50 a week, meaning all of your salary will be seized except for the protected amount. Also exempt from levy are unemployment benefits, workers’ compensation benefits, certain public assistance benefits, income needed to pay court-ordered child support, and certain pension benefits. Other protected property includes certain amounts of clothing, furniture, personal effects, and job-related tools. A state homestead exemption will not protect your home from an IRS tax lien or seizure. The IRS will not know about exemptions or defenses unless you or your advocate informs the IRS.
The IRS can also recover past-due taxes by seizing certain federal benefits and other payments, including Social Security payments (but not Supplemental Security Income payments). The IRS can levy 15% of your entire Social Security benefit. Unlike other forms of federal government seizures of benefit payments, the first $750 of your monthly income is not protected. In some cases, the IRS will levy even more than 15% of Social Security benefits.
Generally, the IRS will exempt low-income taxpayers from a levy on Social Security benefits. If your Social Security benefits are being seized, you should call the IRS at 800-829-7650 and specifically ask for them to remove the levy and place you in “currently not collectible” status or ask for a payment plan in a lower amount than the levy. Generally, the IRS will remove a Social Security levy if you are low-income. Resources for getting help are listed in at the end of this article.
When you receive a notice that your property is being levied or a lien is being placed on it, you can request a review of your case called a “Collection Due Process” hearing on Form 12153. You have thirty days from the date of the notice to request a hearing. The hearing request will result in a suspension of collection activities, including any levy, during the appeals process. During the hearing, you can request one of the payment options discussed earlier in this article—an installment agreement, an offer-in-compromise, or non-collectible status. In certain situations, you can dispute that you owe the tax.
Unless most or all of your assets and income are exempt from levy, it makes sense to negotiate for one of the three options for paying your tax debt to avoid seizure of personal property and income. Make sure any agreement is in writing. A good source for information about taxes is the IRS website at www.irs.gov.
Effect of Bankruptcy on Your Tax Debt
Bankruptcy is not as effective a remedy when dealing with taxes as with other debts. In general, only old taxes debts can be discharged in a chapter 7 bankruptcy, for example, where the debt stems from a timely filed return that is more than three years old. Existing tax liens are likely to remain on your property even after a bankruptcy. In a chapter 13 bankruptcy, the full amount of the taxes owed can be paid in installments over a three-year to five-year period.
You may be able to get help with your tax problems from a Low-Income Taxpayer Clinic. These are legal clinics based at law schools and legal services offices that help low-income taxpayers who have disputes with the IRS. Clinic locations are listed in IRS Publication 4134: Low Income Taxpayer Clinic List, and can be searched online at www.irs.gov/advocate/low-income-taxpayer-clinics/low-income-taxpayer-clinics-map. Another option may be your local legal services office, which can be located using http://lsc.gov/find-legal-aid.
In some cases, you can get assistance from the IRS Taxpayer Advocate Service, an independent organization within the IRS that helps taxpayers who have not been able to resolve tax problems through normal channels. You should fill out Form 911 or call 1-877-777-4778 to request Taxpayer Advocate Service assistance. IRS forms can be found at www.irs.gov.