Tuesday, November 22, 2016

Resolving tax debts outside of bankruptcy



Here at Shenwick & Associates, many of our clients have concerns about tax debts. However, our bankruptcy practice is over 20 years old, and in our experience, tax debts are more easily resolved than student loan debts.

In order to discharge taxes in bankruptcy, the taxpayer must show that:


  1. There is no fraudulent or willful evasion of the tax debt.

  1. The tax debt is at least three years old.

  1. A return for the tax debt was filed at least two years ago.

  1. The income tax debt was assessed by the IRS at least 240 days ago.


Other options outside of bankruptcy also exist for resolving tax debts:

  1. Currently Not Collectible (CNC) Status. If the IRS agrees that you can't both pay your taxes and your reasonable living expenses, it may place your account in CNC (hardship) status. While your account is in CNC status, the IRS will not generally engage in collection activity (for example, it won't levy on your assets and income). However, the IRS will still charge interest and penalties to your account, and may keep your refunds and apply them to your debt.

    Before the IRS will place your account in CNC status, it may ask you to file any delinquent tax returns.

    If you request CNC status, the IRS may ask you to provide financial information, including your income and expenses, and whether you can sell any assets or get a loan.

    If your account is placed in CNC status, during the time it can collect the debt the IRS may review your income annually to see if your situation has improved. Generally, the IRS can attempt to collect your taxes up to 10 years from the date they were assessed, though the 10-year period is suspended in certain cases. The time the suspension is in effect will extend the time the IRS has to collect the tax.

  1. Offer In Compromise (OIC). An OIC allows you to settle your tax debt for less than the full amount you owe. It may be an option if you can't pay your tax liability, or doing so creates a financial hardship. The IRS considers your unique set of facts and circumstances:

    Ability to pay;
    Income;
    Expenses; and
    Asset equity.

    The IRS generally approves an OIC when the amount offered represents the most it can expect to collect within a reasonable period of time. However, to be eligible for an OIC, taxpayers must be current with all filing and payment requirements.

  1. Installment Agreement. If you're financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. Before applying for any payment agreement, you must file all required tax returns.


Tax cases and their resolution are challenging, even for experienced practitioners. For advice on how to deal with your tax debts, please contact Jim Shenwick.