The IRS may be the last agency you think of when you need help during a financial crisis. However, it offers programs that could relieve your monetary hardship and give you extra time to get caught up with your IRS tax debt. When you experience financial challenges because of your delinquent taxes, you may benefit by taking advantage of one of the IRS hardship programs.
Currently Not Collectible (CNC) Status
If you have little or no income and few if any assets, your best option for tax relief may be to request that your account be put in Currently Not Collectible, or CNC, status. When the IRS labels your account as CNC, it ceases its collection activity against you and halts any seizure of your assets or income.
However, CNC status does not mean that your debt is forgiven. It will still continue to accrue interest, and you will eventually have to pay back the IRS debt.
Nonetheless, CNC status for your account leaves your income and assets intact. The IRS also will continue to review your case so that it knows when you have the means to pay back your back taxes.
Offer in Compromise (OIC)
When you have more income and assets necessary to qualify for CNC status, you may consider applying for an Offer in Compromise, or OIC. An OIC lets you settle your IRS debt without sacrificing all of the money you have in your bank account or all of the assets you have in your possession.
Your offer to the IRS must be reasonable and reflect the amount of money that you earn or assets you have at your disposal. If the IRS accepts your offer, you settle your debt and bring your account to a zero balance.
Installment Agreement
If the IRS turns you down for both a CNC or OIC, you can still find some relief from your tax burden by working out an installment agreement. This agreement lets you pay a set amount toward your back taxes each month. The amount that you pay monthly will be based on what you earn and the monetary value of your assets.
When you agree to a payment plan, it is important that you make your installment payments on time each month. If you default on the agreement, the IRS has no obligation to work out a new installment plan with you in the future. It also can demand that you pay your debt in full immediately.
Declaring Income
Regardless of the hardship option you choose to resolve your IRS tax debt, you must remember to be completely honest and to declare all of the income that you have at your disposal. The IRS considers many sources of money to be eligible income that must be reported on your returns.
For example, you must declare any money that you withdraw from your retirement savings during the year. When you withdraw money from your IRA, 401k, or another retirement account, you must report that income unless you are:
- 59 ½ years old or older
- Disabled
- Using the money to pay for your health insurance costs
- Unemployment income is considered to be taxable income.
Finally, you must declare any debts that you had forgiven or canceled during the year. The IRS considers these cancellations or debt forgiveness to be taxable income. Examples of these canceled or forgiven debts include:
- Foreclosures
- Repossessions
- Voluntary return of property to the lender
- Abandonment of property
- Principle residence loan modification
Despite claiming money from these additional sources of income, you should take advantage of any tax exemptions available to you. For example, the Earned Income Tax Credit could lead to you being owed hundreds or thousands of dollars from the IRS.
Depending on the amount of your refund, the IRS could use it to pay off some or all of what you owe. If any money is left over, it will be refunded back to you.
Owing back taxes does not have to lead to financial hardship. You can find relief and avoid seizure of your income and assets by using one of the available IRS hardship options for delinquent tax accounts.
