Here in the United States, tax collection is based on your ability to pay. Due to unfavorable circumstances, e.g. Coronavirus or poor financial management, you may not be able to pay your tax bill.
It is estimated that by the 2020 extended tax season, as many as a third of American taxpayers may not be able to fully pay their taxes on time.
It’s a bad idea not to file income taxes, so consider filing even if you can’t pay!!!
The tax authorities have files on almost everyone’s wages and income. Without a tax return being filed, tax authorities will make their own substitutes for returns that often lack the withholds and credits that taxpayers would get if they filed. Filing begins hours at the time you can be audited, time for collection, and begins aging tax debts for potential discharges in bankruptcy or compromise offers. Without filing compliance, it is impossible to obtain or maintain an installment payment agreement, or request any other type of patience. Ignoring the tax filing requirements will eventually lead to a levy where money is suddenly confiscated from your bank account.
So even if you can’t pay, it’s still recommended to apply!
One of the good outcomes for taxpayers is when taxes are miscalculated in the first place. Due to the complexity of the US tax code, a surprising number of tax returns, especially self-prepared tax returns, are incorrect, with substantial errors that can often go both ways.
Tax returns with errors can be corrected, amended to produce a refund within two years from the date of payment or three years from the date of filing under internal income code (IRC) section 6511. After the IRS loss in Weisbart v. Revised U.S. Treasury Regulations indicate that the IRS will reconsider all claims for refunds that were previously disallowed for similar reasons, regardless of length.
If a corrected tax return reduces outstanding debt rather than generates a refund, the return can be corrected at any time (although once in collection, the administrative procedure may be more complicated than filing an amendment).
Again, billing is based on ability to pay. If you can’t afford to pay your tax debt in full, you can get an installment agreement that allows for affordable monthly payments. If you are unable to make any payments, you may be placed in an unbilled state and billing activity suspended until your situation improves, with your situation reconsidering within two years.
Ability to pay is based on a complex formula using regional standard fees. Allowable fees are based on greater or less than actual or standard fees depending on the nature of the fee and the period of collection. The IRS form used to determine ability to pay is called Form 433. This form is available in several flavors, 433-A and 433-F being the most commonly used. If you want this kind of relief, you must provide a bank statement or receipt for a period of 3 months, and all assets that may be used to pay tax debts must be disclosed. The 433 requests and strategies are complex to the point that it is desirable that most of the 433 filings be prepared by a tax professional.
(At the time of this writing) an “automatic”, “lean” or “non-lean campus” installment agreement of up to $250,000 which would be paid in full under the billing statute of limitations can be set up automatically, and does not require disclosing 3 months of financial information or filling out forms 433.
Offers in compromise, doubts for collectibility (settling tax debts for dollar bills, as widely advertised on TV) may be a good option for certain taxpayers without significant future income potential. IRC 6502 usually gives the government 10 years after the assessment to collect the tax debt. If 10 years are likely to run out without a full vote then the government will consider the offer a compromise. An offer in compromise is NOT just a negotiation! It is based on the calculation of a reasonable collection potential from the same information that was used to request the installment agreement.
Bankruptcy will often release income tax payables that are more than 3 years old that are kept for more than 2 years if there is additional debt that is more than 240 days old. It will not waive tax debts from a replacement return (if the taxpayer never filed), and will not waive any liens attached to real estate.
Please note that this is a growing complex area of regulatory practice, and not all details can be communicated in a short article like this one.