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, specific strategies may put you in a stronger position to deal with your tax problem.

What Happens If I Don’t File?

You 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 collecting the debt through liens, levies, and garnishments unless you present a reasonable plan for a resolution.   

How To Deal With Back Taxes?

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

• Payment plan
• Offer in Compromise
• Penalty Abatement
• Hardship status

You will need to file your taxes in the future.

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 disqualified by the old OIC procedures.

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

Will The Government Abate The Penalties?

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

First, determine what penalty you want to be abated.  The most commonly applicable penalties for individuals and small businesses are failure to file, failure to pay, and failure to make quarterly or payroll tax deposits).  It would help if you convinced the IRS that you acted reasonably and prudently and still could not comply. You would need to prove that events beyond your control caused your delinquency.

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 payment. The government figures that if you could earn the income, you should be able to walk into an accounting office and file your taxes by April 15^th. If you had income but could not pay the tax signals, you claimed too many exemptions at your job or failed to budget for the taxes if you were self-employed. However, your delinquency might have been reasonable, considering 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 were you prevented from meeting your tax obligations?
• How did you handle your other obligations during this period? Did taxpayers exercise ordinary business care and prudence to mitigate the non-compliance?
• Does the event’s timing closely correlate with failure to file or pay 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 support your claim, the better your chances for penalty relief.

Can I Pay My Back Taxes In Installments?

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

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 your debts

Related Topics: Business Decline, Divorce, Illness, Addiction