If you owe back taxes to the Internal Revenue Service, you have several options. You may appeal to the IRS to reduce your tax bill. If you believe the IRS is in error, you may demand a hearing. In some cases, you may take your case to federal court. In addition, some tax debts can be discharged in bankruptcy.
If the IRS assesses interest and penalties because you filed your tax return late, it may waive these penalties if you can show reasonable cause for your failure to file on time. Your underlying tax burden will not be reduced, and lack of money to pay is never accepted as an excuse. Even if a hurricane hit your town on April 14, it will not be considered reasonable cause as long as it did not prevent you from filing your tax return on time. You must provide documentary evidence for all of your assertions.
If you want the IRS to waive a portion of either interest, penalties or your underlying tax liability, you can make an offer in compromise by filing Form 656. The IRS may grant an offer in compromise if a careful examination of your finances reveals that you will probably never be able to pay your back taxes -- if, for example, you are elderly, unemployed and living on a fixed income. It may also grant an offer in compromise if it concludes that it made an error in calculating your tax liability.
If you believe the IRS is in error about how much you owe, you can challenge the agency at a hearing. You may use the collection due process program once the IRS has notified you that it intends to levy on your property to satisfy your tax debt, and you may appeal an adverse decision to the U.S. Tax Court. You may not take your case to federal court until you first challenge the IRS under the collection due process program.
Some tax debts, including penalties and interest as well as underlying tax debt, can be discharged by a bankruptcy court in Chapter 7 proceedings. The debt must be at least three years overdue and must have been assessed against you by the IRS at least 240 days before you filed your bankruptcy petition. Only income taxes can be discharged. If you committed or attempted fraud with respect to the tax debt for which you seek discharge, your discharge request will be denied. To be eligible for discharge, you must have filed your tax return on time for the last two years.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.