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I Owe Taxes That I Cannot Pay – Common Questions And Practical Answers

As a leading tax law firm, we at David Coffin PLLC strive to help clients throughout Texas with complex tax matters. From exploring your options to helping you understand the law, you can rely on us for trusted advice with a spectrum of problems.

Many people during tax time discover that they owe federal income taxes but cannot pay the total amount owed. Other taxpayers let tax time serve as a reminder that they have not filed their income tax returns for several years, resulting in the recurring and burdensome thought that they could owe a significant amount of tax when they do finally file those past returns. As a result, people in these situations have many questions, some of which are listed and answered below:

Will I go to jail?

The answer to this question requires much more discussion and analysis with the taxpayer before answering. However, if you are a taxpayer who simply failed to withhold enough taxes from your paycheck or failed to pay sufficient estimated tax deposits during the years such that you owe taxes when you file your return, then, generally speaking, you are at low risk for a criminal probe and therefore should not worry about going to jail. However, if you have acted in such a way that those acts could be construed as an attempt to avoid the payment of tax or the collection of tax, then you might have some risk of a criminal probe into your failure to file your tax return or to pay taxes. It is not a crime to owe federal taxes unless you had a bad motive in accruing the tax liability. It is best that you talk to an experienced tax attorney regarding your actions if you feel there is some risk of a criminal probe.

Do I have to pay the entire balance due at one time?

Usually not. The IRS is willing to work out a payment plan if you cannot fully pay the liability. The payment can be an easily determined and fixed amount, if the total of the original taxes, penalties and interest owed is less than $50,000. However, if you owe more than $50,000, determining the amount of the installment payments requires some computations based on your level of income and expenses. Negotiating a payment plan with the IRS requires an understanding of your exact options at the time the IRS begins its collection efforts. While using an experienced tax attorney is not required, it might be best to employ such an attorney so that you can negotiate a payment plan with monthly payments that you can comfortably maintain.

What if I cannot afford to make any payments?

The IRS will not force you to make payments if you do not have income above and beyond your reasonable and normal living expenses to make any payments. However, in order to convince the IRS that you cannot afford to make any payments, you must provide information to support the reason for nonpayment. Generally, you must provide your normal income and monthly expense obligations, and if that information shows you cannot afford to make any payments, the IRS will place you in “currently not collectible” status. However, the IRS will determine whether your normal monthly living expenses are reasonable or not, so don’t expect that your expenditures for luxury automobiles, oversized housing or private school, among other items, will pass scrutiny with the IRS. While “currently not collectible” status sounds like a great alternative, you must realize that penalties and/or interest continue to accrue so that the balance will continue to grow rather than go away. On the other hand, there may be certain instances where “currently not collectible” status is clearly the best option for you. If you cannot afford to make payments, then you should talk to an experienced tax attorney about analyzing your situation to determine whether obtaining “currently not collectible” status is best for you.

I hear a lot about settling taxes for “pennies on the dollar”; why can’t I do this?

This program is known as “offer in compromise” (OIC or Offer). If you qualify for an “Offer,” then you should definitely pursue this route. While not all taxpayers qualify for an OIC, it is a great alternative if you do. An OIC allows you to compromise your tax debt to a dollar figure that is usually much less than the amount of the taxes owed. If you are a taxpayer who struggles to make ends meet every month with your current level of income and you do not own significant assets from which the IRS can collect, then you may be an excellent candidate to file an OIC. On the other hand, taxpayers who have a significant income or who have significant assets usually do not qualify for an OIC. Whether or not you qualify for an OIC requires a careful analysis of your financial situation. The IRS will not simply accept a stated offer that does not fit within the OIC regulations and guidelines. If you would like to explore whether you qualify for an OIC, contact an experienced tax attorney.

How long does the IRS have to collect past due taxes?

Generally, there is a 10-year statute of limitations on collection, after which time the IRS is barred from collecting the tax. However, you should know that the 10-year period doesn’t start to run until you file your return and the tax is assessed, or, in other words, when the tax “goes on the books.” Therefore, if you have never filed a return, the 10-year collection period never begins. Sometimes, the IRS will prepare a return on your behalf (a substitute return or SFR). In order to determine when the statute of limitations started, you must determine when the IRS completed its preparation of your return, which usually occurs several years after the return was originally due. Additionally, there are many things that toll, or extend, the 10-year collection period, so you must be aware of those items as well. While you might believe that the taxes you owe are almost 10 years old and therefore the collection period is about to expire, you should contact an experienced tax attorney to review your tax account information to help you determine whether waiting for the 10-year statute of limitations on collection is the best alternative for you.

Are my taxes dischargeable in bankruptcy?

Once again, the answer to this question requires a much longer discussion with the taxpayer to determine whether the taxes involved are dischargeable. The rules regarding the dischargeability of taxes are very complex and require a thorough analysis of the history surrounding the taxes owed. Generally, income taxes older than three years may be dischargeable, but many other tests and factors are to be examined before you can safely conclude that your taxes are dischargeable. Payroll taxes are never dischargeable. Additionally, under current bankruptcy laws, if the IRS prepared a return on your behalf, then the income taxes resulting from those returns are never dischargeable. The bottom line is that you need an experienced tax attorney to review your tax situation to determine whether your taxes are dischargeable in bankruptcy.

Which of the above solutions are best for me?

The answer to this question requires a careful analysis of your tax situation. Everyone’s federal tax situation is different, and an experienced tax attorney should know that each of the above alternatives should be investigated and analyzed to determine which one fits you. If your tax professional cannot answer your questions about each situation above, then it is possible that you may not be considering all your available alternatives.

Learn More About Your Tax Options

If you owe taxes that you cannot pay, do not despair. Reach out to our lawyers at David Coffin PLLC. We can advise you on how to proceed and what to expect from the future. To schedule an initial consultation with us, please call 817-756-1792 or use our online contact form.