Many taxpayers owe the IRS. This can be overwhelming, especially in the COVID economy, where many individuals and small businesses face insolvency for the first time. They often must use income that should go to taxes to cover necessities, such as mortgages, rents, and groceries.
When suffering this type of shortfall, it’s natural to wonder if there is a way to eliminate or reduce your IRS debt. The answer is yes. The government offers several programs that can lead to tax abatement.
A Certified Public Accountant (CPA) can help you navigate your options.
Bankruptcy
Many people fail to realize that some income taxes can be discharged in a Chapter 7 bankruptcy. However, only back taxes due at least three years before the bankruptcy are eligible. If you owe a ruinous amount of discharge eligible taxes and will not lose property in the bankruptcy, a Chapter 7 may be the path to a fresh start.
The IRS charges hefty late fees and failure to file fees. Even if you lack the funds to pay your taxes, you can reduce the fines by 50% by filing without payment. If possible, request a payment plan when you file, which could prevent back taxes from ballooning.
Filing the return also prevents the IRS from completing a substitute return (SR). The IRS uses the substitute return to calculate how much the delinquent taxpayer owes and generate a bill. From there, the agency can begin collections activity.
The IRS has enhanced powers of collections. For example, it can garnish wages without a court order. It can also levy bank accounts and seize valuable property, such as a home or vehicle. These aggressive collection activities are the worst-case scenario. Thankfully, a CPA can intercede before the collections process begins, protecting your hard-earned money and valuable property.
Avoiding Wage Garnishment
Most creditors can only garnish a legally specified percentage of income. For example, many states limit wage garnishment to 20%. The IRS is beholden to no such restrictions.
It does, however, have to leave the taxpayer enough to meet bare minimum living expenses. The IRS uses a formula based on family size to determine how much it must leave. For example, the IRS may calculate that a single taxpayer must have $500 per week to meet the basics. If the taxpayer makes $1,500 per week, the IRS can then garnish $1,000 each week.
It’s important to know that the IRS uses a one-size-fits-all approach in determining how much it can garnish. The standard amount it must leave takes no account of your budget. For example, if a taxpayer has an expensive mortgage, what the IRS does not garnish may be insufficient to cover the housing expense.
Tax Abatement Options
Even if a payment plan is granted, the burden of maintaining that plan often overwhelms taxpayers. It’s hard to keep paying monthly back tax payments, current taxes, and pay the bills for up to five years. One of the best options for financially stressed taxpayers is to hire a CPA to seek an abatement of taxes and penalties.
CPAs have the authorization to represent clients before the IRS. They know the tax codes in and out and can first reduce your tax liability through tax planning and finding additional deductions. With taxable income reduced to a minimum, penalties, which are based on a percentage of tax owed, you are in the best possible position to request an abatement and payment plan.
The IRS has several programs that delinquent taxpayers can use to settle their debt for a lesser amount. As a highly bureaucratic institution, the IRS bases approval for these programs on several criteria. It also employs formulas that determine how much of an abatement it is willing to accept. A CPA can analyze your situation, decide which program(s) you qualify for, and offer the most considerable abatement.
The IRS has a reputation for harsh collections practices, and it does have extraordinary property seizure powers. However, those powers are usually directed at wealthy individuals who are evading taxes. The IRS prefers to spend its time on large tax debts that it knows are collectible. For taxpayers who have fallen behind because they lack the means, the IRS likes to settle the debt through one of its Fresh Start programs, which are designed for lower-income taxpayers that the IRS has difficulty collecting from.
If you are stressed by tax debt, call a CPA today. Filing back returns and qualifying for an abatement can end your tax troubles once and for all.
Tax Avenger Canton MI is an experienced CPA firm specialized in Tax Problem Resolution. Dealing with the IRS is complicated and quite challenging, and we can help. With 20 years’ experience, we will help you reduce your tax liabilities and put together a tax plan for you to ensure that you will not have any future problems with the IRS.
We offer full-service tax solutions for individuals and businesses including accounting services, business startup, payroll services, tax preparation services and more. Call today for a Free Consultation!