Back Taxes Caused By Illness

TH Content Area 6.1 Illness

Serious illness is a very common cause of IRS tax delinquencies.  When a taxpayer or a family member become seriously ill, day-to-day life must be put on hold in order to survive and recover from the disease.

Several tax relief programs are available following an illness or other hardships. The level of IRS cooperation will depends on each taxpayer’s specific circumstances:

If You Cannot Pay The Taxes Due To Illness:

Apply For An Offer in Compromise

Taxpayers who cannot pay the taxes due to an illness 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. The IRS’ Fresh Start Initiative has recently expanded this settlement program. The IRS will thoroughly investigate your finances and hardship claim to determine if you qualify for the reduction.

If You Got An Inflated Bill From The IRS

Ask For A Reconsideration

If you were unable to defend yourself in a tax audit, the IRS might be over-billing you. Some taxpayers only learn about the audit when a tax bill, or worse, a levy arrives in the mail. If you did not participate, or agree to the additional assessment you may qualify to have the audit findings recalculated. An audit reconsideration request needs to be in writing, spelling out the specific issues you you believe to be incorrect.  You must attach prooof that certain income or deductions were treated incorrectly by the auditor, resulting in a higher tax bill.

Submit An Accurate Tax Return

The IRS has the authority to file tax returns on behalf of non-filers. The government will generally file at the worst tax rate, and neglect any exemptions or deductions. Such SFR (Substitute Federal Returns) filings result in a much higher tax bill compared to the return being done by the taxpayer or their accountant. In such cases it is generally beneficial 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 or an offer in compromise in attempting to reduce the  IRS debt.

How To Get IRS Penalties Dropped Due To Illness or Death?

The IRS may reduce or drop tax penalties if you can show reasonable cause for failing to file and/or pay your taxes.

Penalty relief may be warranted if the taxpayer uses ordinary business care and prudence in dealing with their taxes, but can’t meet the requirements. Something beyond taxpayer’s control.

Is Illness Reasonable Cause For Penalty Relief?

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.  This will include the taxpayer’s:

  • Spouse
  • Sibling
  • Parents
  • Grandparents,
  • Children

What Proof Is Needed For Penalty Relief?

The IRS will carefully consider the following factors:

  • How the parties are related,
  • Time of the death,
  • Seriousness of the illness, and how long it lasted,
  • Time and causes of the absence,
  • Why taxpayer cold not meet their obligation,
  • Were other obligations addressed, and
  • How fast did the taxpayer attempt to resolve the tax problem after returning.

What Evidence Should You Present For Penalty Abatement?

For a successful penalty abatement, the taxpayer will need to show that the non-compliance was unavoidable. You should be ready to provide the following documentation:

  • Medical records
  • Death certificates
  • Date of absence from work
  • Doctor’s reports

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.

If the debt is under $50,000 the IRS will generally allow a 72-month window to pay off the balance, without extensive financial investigations. If you need more time to pay off the balance, you will need to submit Form 433-F to detail your financial ability.

Other provisions in the Internal Revenue Manual allow taxpayers to negotiate affordable monthly payments over a longer period.

Can I Bankrupt Old Taxes?

An illness or other unforeseen disasters can leave you with a mountain of debt. Tax debt is just one residual consequence of prolonged health 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.

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: Business Decline

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