Tax Problems Caused By Financial Hardship

Is Financial Hardship An Excuse Not To File Taxes?

Job loss, business failure, and unforeseen financial burdens will eventually cause tax problems.  Financial hardship is generally not an excuse for neglecting to file taxes.  Once the IRS identifies you as a non-filer or a tax debtor, you may be rapidly overwhelmed with liens, levies and audits.  However, certain strategies may put in a stronger position go deal with your tax problem.

What Happens If I Don’t File?

You really need to file your taxes before the government contacts you. You minimize your criminal exposure, and may also save money by taking advantage of allowable tax deductions and credits.  Deductions will not be granted if the IRS files for you.  Once the IRS finalizes the assessment, they will move forward with collection of the debt through liens, levies and garnishments, unless you present a reasonable plan for a resolution.   

TH Content Area 3.1 Financial Hardship

How To Deal With Back Taxes?

If you owe taxes and can’t immediately pay, these are some of your options:

You will need to file your taxes going forward.

Apply For An Offer in Compromise

Offer in Compromise is probably the best tax resolution tool available to taxpayers, allowing you to settle your tax debt for much less than you owe. Recent tax legislation has given new hope to taxpayers who were disqualified by the old OIC procedures.

Our attorneys have extensive expertise with planning, preparing, negotiating and even appealing rejections of a program.

Will The Government Abate The Penalties?

To get relief from penalties, you need to have a good excuse known as “Reasonable Cause”.

First determine what penalty you want abated.  The most commonly applicable penalties for individuals and small businesses are: failure to file, failure to pay, failure to make quarterly or payroll tax deposits).  You need to convince the IRS that you acted reasonably and prudently and still were unable to comply. You would need to prove that your delinquency was caused by events beyond your control.

Each penalty abatement request must be accompanied by documentation to back up your excuse. The IRS is not just going to accept your story without substantiation.

Does the IRS Consider Financial Hardship Reasonable Cause?

Generally financial hardship is not a blanket defense for late filing or late payment. The government figures that if you had the ability to earn the income, you should be able to walk into an accounting office and file your taxes by April 15th. If you had income, but could not pay the tax signals that you either claimed too many exemptions at your job, or failed to budget for the taxes if you are self employed. However, your delinquency might have been reasonable in light of all the circumstances. IRS may accept other excuses as reasonable cause, provided that the taxpayer acted reasonably. For example, you used your money to pay unforeseen medical expenses, or you had to make frequent trips to take care of an ill relative.

The IRS will look at the following factors in determining reasonable cause:

  • What events occurred, when, and how you were prevented from meeting your tax obligations?
  • How did you handle your other obligations during this period? Did taxpayer exercise ordinary business care and prudence to mitigate the non-compliance?
  • Does the timing of the event closely correlate with failure to file or pay the taxes?
  • Do you have a history of non-compliance?
  • Was the situation beyond your control, unavoidable and unforeseeable?

The more information you can provide to back up your claim, the better your chances for penalty relief.

Can I Pay My Back Taxes In Installments?

If you need time to pay off your tax balance, you will need to negotiate an installment agreement.  The IRS may allow you time to pay off your taxes in installments based on your financial ability.  You need to make sure that you do not commit to a payment that is too high for you to handle every month, or you will default the agreement.  Keep in mind that you still have to pay your current taxes on top of the back taxes.  If you fail to make the promised payments or incur another filing, or payment delinquency, your agreement will be defaulted.

Can I Bankrupt Old Taxes?

Tax debt is just one residual consequence of prolonged financial problems.

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.  Tax 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

Related Topics: Business Decline, Divorce, Illness, Addiction

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