1. Federal Income Tax Debt
Chapter 20
Federal Income Tax Debt

2. Federal income tax debt
Most people have a variety of tax obligations.
The three most common are: 1) property taxes, 2) federal income taxes, and 3) state income taxes.
You should give special consideration to your federal income tax obligations for two reasons:
The Internal Revenue Service (IRS) has special powers to collect back taxes.
The IRS sets out specific procedures and protections that you should know about if you are behind on your tax obligation.

3. File the return on time even if you do not pay the taxes owed
One of the worst things is “not filing your tax return,” even if you cannot afford to pay taxes. You must file an income tax return if you are a U.S. citizen or resident alien.
In 2015, you have to file your return for the 2014 tax year if you are single and your taxable income exceeds $10,150:
$10,150 for individuals($11,700 if you are over 65)
$13,050 for head of household ($14,600, 65+)
$20,300 for joint filers ($22,700 if both filers are 65+)
If you are self-employed, you must file income taxes if you earned over $400 (this amount increases each year).
The dollar amount for filing includes all income, including cash paid to you.
Always file your tax return even if you do not send in your tax payment. Why? The penalties will be much smaller.

4. File the return on time even if you do not pay the taxes
April 15th is the deadline for most people to file individual income tax returns and pay any taxes owed.
Filing extensions are available; however, you will be charged both interest and a late-payment penalty during the time of the extension.
If you fail to file either an extension or your tax returns by April 15th, and you owe taxes, you may be prosecuted for a misdemeanor crime (does not usually happen). Generally, the IRS will prepare a proposed tax return, called a “substitute for return,” which shows what the IRS thinks your tax return might be. You have certain rights to dispute all or part of that proposed return.

5. Filing the return on time even if you do not pay the taxes
If you file late, the IRS will assess a late-filing penalty.
It is best to avoid the additional penalties because they increase your debt. Failure to pay is not, by itself, a crime. Instead you will merely be behind on a debt.
Getting an extension to file is also not the solution.
The IRS will automatically give you a 6-month extension if you request it with payment of the taxes you are likely to owe.

6. Keep in mind! Getting an extension to file is not the solution!!
The IRS will automatically give you a 6-month extension; but it does not give you more time to pay the taxes you owe; you will be charged both interest and probably a late-payment penalty during the time of the extension.
Note that if you cannot pay the taxes due, it is a better idea to file the return, and pay as much as you can, and then consider negotiating with the IRS.

7. Four Options for paying tax debt
#1 Pay the taxes by using a credit card or some other source of funds:
You can put your taxes on your credit card. The payment will cost you a “convenience” fee between 1.89% to 2.35% of the payment. [around 2% of the payment]
The credit card interest may be less than IRS interest and penalties, but this is not always true. However, charging the tax to your credit card allows you the time to develop a plan to pay down the credit card debt at a later time.
The first option does not require IRS approval! But, the other three options require IRS approval! If IRS does not grant approval, you have the right to seek an appeal or ask for a review of your case.

8. Four Options for paying tax debt
#2 Enter into an installment agreement with the IRS:
Ask the IRS to allow you to make monthly installments over a period up to six years. The IRS will generally allow this with interest, penalties, and a user fee of $120 [reduced to $52 if you agree to pay using direct debit from your bank account].
The interest rate will be the federal short-term rate plus 3%. This is lower than most rates for unsecured loans.
Even with penalties, an installment plan may cost you less than putting your taxes on a credit card.
Requires IRS approval. If they are not approved, you have the right to seek an appeal.

9. Four Options for paying tax debt
#3 Negotiate by seeking an “offer-in-compromise”:
This happens when the IRS settles with you and allows you to pay less than what they claim you owe.
An offer-in-compromise is usually only granted when you have a dispute as to what you owe, or when there is doubt that the past- due taxes could ever be collected in full.
There are special IRS forms that you must file to request an offer- in-compromise.
You will also need to pay an application or user fee ($186) plus 20% of your offer unless your income is below a certain amount.
Requires IRS approval. If they are not approved, you have the right to seek an appeal.

10. Four Options for paying tax debt
#4 Request a hardship determination by seeking “currently not collectible” status:
The IRS only grants this status if you do not have any assets you could use to pay your taxes and you do not have any income left after “allowable expenses,” which are expenses determined by the IRS as necessary for living.
Currently not collectible status is not permanent; does not mean the tax is forgiven or reduced. Interest and penalties will continue to accumulate during this time.
Requires IRS approval. If they are not approved, you have the right to seek an appeal.

11. Steps the IRS can take to force payment
If you do not set up one of the 4 payment options, the IRS will force payment.
If you do not address your tax debt satisfactorily with the IRS, it will send you a series of collection letters, called a “Notice of Tax Due and Demand for Payment,” to your last known address.
The IRS may also send you a notice that it will seize or “levy” your property. The IRS can take any or all of your property (e.g. bank accounts, paychecks, and homes), with the exception of certain exempt types of income and possessions.
The IRS can also recover past-due taxes by seizing certain federal wages, benefits and other federal payments, including Social Security payments. The IRS can levy 15% of your entire Social Security benefit.
Unlike other forms of federal government seizures of benefit payments, the first $750 of your monthly income is not protected.

12. IRS can force payment: “Collection Due Process”
When you receive notice that your property is being levied, you can request a review of your case called a “Collection Due Process” hearing on Form
You have 30 days from the date of the notice to request a hearing. The hearing request will suspend collection activities, including a levy, during the appeals process. During the hearing, you can request one of the payment options discussed earlier (e.g., an installment agreement, an offer-in-compromise, or a hardship determination).
Unless most of your assets and all of your income are exempt from seizure, it makes sense to negotiate for one of these three payments options to avoid seizure of personal property and income.
Make sure to get any agreement in writing!!

13. Effect of bankruptcy on your tax debt
In general, most tax debts cannot be discharged in a chapter 7 bankruptcy.
Some exceptions apply when the assessed tax debt is more than 3 years old, if you properly filed the tax return for the year in question.
Existing tax liens are likely to remain on your property even after the bankruptcy.
In an chapter 13 reorganization, the full amount of the taxes owed can be paid in installments over a 3-5 year period

14. Seeking help!
Seeking help from Low Income Taxpayer Clinic (LITC). These legal clinics are based at law schools and legal services offices to help low-income taxpayers who have disputes with the IRS.
(Your local service can be found at
In some cases, you can get assistance from the IRS Taxpayer Advocate Service.