June 27, 2017

“I Can’t Pay My Taxes”

Rip Van Winkel has not filed taxesIf you figured that you are unable to pay your federal or state income taxes in full and on time, there are only five options available to you:
  1. Get current.  Some choose to get current through whatever means necessary, including a bank loan or gift from family. The IRS accepts payment by credit card. So does the North Carolina Department of Revenue (NCDOR). Be aware, though, that credit card debt used to pay taxes may not be dischargeable in a bankruptcy case.
  2. Installment agreement and payment plan.  The IRS and the NCDOR both offer installment agreements in many circumstances.
  3. Bankruptcy.  I rely on a 600+ page book that analyzes the dischargeability of taxes in consumer bankruptcy cases, so please understand that this is a highly complex area of the law that cannot be adequately summarized for this website.  That being said:
    • Many people (and lawyers, for that matter) are not aware that income tax debt can, under certain circumstances, be discharged in full (no payments) in a Chapter 7 bankruptcy case.
    • In other circumstances, income taxes can be paid in a Chapter 13 bankruptcy case , with the actual tax amount due being paid over five years, but with no interest and virtually no penalties.
    • On the other hand, trust fund taxes are generally not dischargeable in a bankruptcy case. Trust fund taxes are taxes that are required to be collected or withheld from a third party, such as sales taxes and payroll taxes.
  1. Offer in compromise (OIC). This is an option for both federal and North Carolina tax liability.
    • A federal OIC is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayers tax liabilities for less than the full amount owed.  If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.
    • The North Carolina Secretary of Revenue has statutory authority to accept full settlement of a liability for a lesser amount that is due when, in his or her opinion, it is in the best interest of the state.
    • WARNING: Offers in compromise are a waste of time and money for most taxpayers, and this area is fraught with traps for the unwary. The IRS has specifically warned of advertisements and solicitations offering to settle tax debt for  pennies on the dollar.  Taxpayers should consult with a qualified and experienced advisor (such as a CPA, enrolled agent, tax attorney, or bankruptcy attorney) before going down this path.
  1. Collection, through tax liens, levies, sales, and garnishments.  Above all, remember that the IRS and the NCDOR are super-creditors. Unlike most creditors trying to collect from North Carolina debtors (see N.C.G.S. 1-362), the IRS and NCDOR can and do garnish wages and levy on taxpayer bank accounts. Many exemptions do not apply to tax collections; in other words, property that might be beyond the reach of North Carolina residents’ other creditors can be taken to pay IRS and NCDOR tax debt.

If you are behind in your tax obligations, do not rely on this post or any information found on the Internet as qualified legal advice for your particular circumstances; get legal advice from a good attorney who goes over your entire financial situation with you.

With the heavy hands granted tax authorities you should seek qualified legal counsel so that your rights and options are thoroughly explained for your circumstances.