Dealing With Your IRS Problems One Day At A Time.

TH Content Area 1.1 Addiction

Nobody ever takes his or her first drink or a pill with the intention of one day becoming an addict.

Unintentional though it may be, addiction causes great harm.  Health issues, relationship problems, DUI, job loss, divorce, depression are all well known symptoms of unchecked substance abuse.

However this is a tax help site. Yes, addiction is one of the major causes of tax problems. It is a problem that may start small, like your first drink. At first, you might file a late tax return or owe a few bucks. As the addiction progresses, financial responsibilities take a back seat or get ignored altogether.

Harold’s story is an example of how addiction causes a tsunami of tax problems. His drinking got so bad that he was unable to keep his job and eventually was fired from his high paying position. Harold could no longer continue with his career, and was living off the remainder of his savings in a brokerage account. He did not file his tax returns for 7 years, and the IRS presented him with a gigantic tax bill based on their own calculations (the penalties were “mind blowing”). Eventually he got sober. However, his recovery took up most of his energy, and he still could not work. Since Harold ignored, or could not deal with the IRS bills that were coming in the mail on monthly basis, the IRS and the State of California started enforcement. The tax authorities eventually went after his nest egg and attempted to levy the remaining funds in his brokerage account. He was faced with a decision, to either deal with the back taxes, or being homeless, and most likely relapsing.

TaxHelpers successfully resolved Harold’s tax problem through various IRS programs discussed here:

If You Cannot Pay The Taxes

Apply For An Offer in Compromise

Taxpayers who cannot pay the taxes due to an addiction or another severe hardship may qualify for an IRS Offer in Compromise program.  The reduction is determined by your assets and your inability to pay the debt in the future.   

If You Ignored The IRS And Got An Inflated Tax Bill

Ask For A Reconsideration

Addiction, especially in the more advanced stages will overshadow most legal and financial obligations, leaving taxpayers unable to defend themselves in a tax audit. Some taxpayers only learn about the audit when an inflated tax bill, or worse, a levy arrives in the mail. If you did not participate or agree to the audit assessment, you may qualify to have the bill reevaluated through an audit reconsideration. You must show prooof that certain income or deductions were treated incorrectly by the auditor, resulting in an overinflated tax bill.

Submit An Accurate Tax Return

If you did not file one or more tax returns, the IRS has the authority to file tax returns for you. They will generally file at the worst possible tax rate and ignore any exemptions or deductions. Such SFR (Substitute Federal Returns) filings result in a much higher tax bill compared to returns filed by the taxpayer or their accountant. In most cases it is generally better to file the actual tax return to get the benefits of various deductions and credits. If you still owe a balance, you may want to follow up with a penalty abatement based on your addicition, or an offer in compromise to reduce the IRS debt.

How To Get IRS Penalties Dropped Due To Substance Abuse?

The IRS may reduce or drop tax penalties if you can show reasonable cause for failing to comply with the filing and payment requirement.

Is Substance Abuse Reasonable Cause For Penalty Relief?

It is a widely accepted fact that addiction is an illness.

Section Of The Internal Revenue Manual allows penalty relief:

Death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late. 

What Proof Is Needed For Penalty Relief?

You will need to show that the addiction was so severe that it prevented you from meeting your tax obligations. The following may be helpful in your penalty abatement:

  • Medical records
  • Doctor or counselor letters
  • Treatment facility admission
  • Unemployment or termination records
  • Court records
  • Law enforcement records

What If You Can’t Pay Your IRS Bill Now?

In many cases, all the taxpayer needs is more time to pay off the tax debt. If you are not a good candidate for any of the IRS’ reduction programs, the IRS will allow you a monthly payment plan based on your financial condition.

Can I Bankrupt Old Taxes?

Tax debt is just one residual consequence of addiction.

If you don’t qualify for the OIC program, or have other debts on top of the tax bill, you might be able to get the debt (including taxes) forgiven in bankruptcy. Debt relief may be available under Chapter 7 or 13. If you qualify, Chapter 7 may relieve you of some older IRS debts, while Chapter 13 is a repayment plan for you debts. Some taxpayers may benefit from using both chapters consecutively (7 followed by 13).

Discharging back taxes in bankruptcy is more complicated than other debt. Bankruptcy rules for eliminating old taxes are extremely strict and specific (with numerous exceptions). Unfortunately, many taxpayers either don’t know about tax bankruptcy, or do it incorrectly, or prematurely, thus losing their chance for tax relief.

Related Topic: Divorce

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