How to Get Out of IRS Debt
How to Get Out of IRS Debt
The Internal Revenue Service (IRS) estimates that 290 billion dollars went unreported last tax season. Not all taxpayers who underreport their incomes are, in fact, tax cheats. The IRS freely admits that the current tax code can be confusing and that most folks that make errors do not do so deliberately. Even so, the IRS is rarely willing to negotiate with people who owe them money.
According to their own records, the IRS audits about one percent of the tax returns they receive. Of those 1.5 million tax returns, roughly a third of them were audited for Earned Income Tax Credit (EITC) claims. That means that one third of all returns audited last year came from poor Americans who don't actually pay income tax, but rather receive payments from the government in the form of tax refunds based on the EITC. While the IRS isn't infallible, their systems can be. In a recent study, the National Taxpayer Advocate reported that among EITC audits, taxpayers who hired a tax representative to help them were twice as likely to retain their EITC refunds and were likely to receive twice as much money as those who faced an IRS audit without a representative.
What to do if you are audited?
First things firstdon't panic! Millions of Americans are audited each and every year. More often than not, the IRS thinks you made a mistake. Common tax problems can be handled by a qualified tax consultant or advisor. But the overwhelming evidence points to the fact that you will fair better in an audit if you hire a tax representative than if you face it alone.
After an audit concludes, you may be left with a tax debt. It is important to note that tax professionals may not be able to eliminate or even reduce your tax debt. While it is certainly not unprecedented, it is quite rare for the IRS to admit mistakes or to completely abandon a tax claim. With that said, a tax consultant can help an accused tax delinquent in many ways.
The first thing a tax consultant will do is examine the case against his client and obtain a report from the IRS describing all the tax issues in the taxpayer's IRS file. Unless he uncovers a glaring error that proves the tax debt has been wrongfully assessed, he will typically attempt to negotiate an installment agreement or a favorable settlement, depending on the taxpayers tax situation, personal finances, and past history with the IRS.
As we mentioned at the outset, underreporting income is quite common in America. One in every seven taxpayers owes back taxes, according to a recent estimate. But because of ambiguous laws and government bureaucracy, collecting these debts takes time. Even if the IRS is patient in collections, there are situations when all the waiting in the world will not help the tax debtor earn the money necessary to pay off their tax debt.
Millions of Americans owe billions of dollars in taxes. Most of them are given the opportunity to work out a payment arrangement with the IRS. Tax consultants can help you insist on an installment plan, since few taxpayers can afford to pay their tab in one lump sum. If there are special or extenuating circumstances, a tax consultant may press for a partial payment installment plan or a tax settlement. Under these agreements, the taxpayer only has to pay a portion of his over all tax burden. But understand that these programs are only for the people who cannot afford to pay their taxes.
Bankruptcy
If your tax consultant is unable to negotiate a favorable settlement with the IRS, he may recommend bankruptcy protection. Depending on your debt and current employment, chapter 7 or chapter 13 may apply. It is important to note that while bankruptcy can eliminate some debt, it may not apply to your tax debt. That's right. Bankruptcy doesn't always eliminate tax debt, and it can adversely affect your credit score for many years. Only taxpayers who are in dire financial straits should even consider filing for bankruptcy protection. And even then, it may not help you resolve your tax debt. Certainly, you must still file all old tax returns in order to gain compliance before bankruptcy is even an option.
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