Tax and Tax Debt


Tax is the amount of money every citizen is supposed to pay the federal or state government as part of the government’s total revenue. Tax is what the government authorities utilize to cover their expenditures incurred in providing municipal services as well as benefits such as employment and access to good health and education services among others. It is basically the monetary contribution every legal citizen is bound to make towards the state’s revenue so that the state can continue providing its promised services.

In the USA, the amount of tax owed by a citizen is determined by the income he/she earns annually. There are a number of defined income brackets with their respective tax rates so that there is consistency between what is earned and what is paid as tax. For the year starting as of April 18th, 2016 and ending at April 17th, 2017; the tax rates range from 10% to 39.6%. The income brackets are not only defined by the amount of money earned but also by the status of the citizen. There are, as a general rule, five categories of tax filers which include single/unmarried filers, married persons filing jointly, married persons filing separately and head of the family.

Prior to paying the taxes, citizens are supposed to file returns to the Internal Revenue Service (IRS), which are documents meant to inform the IRS about your level and source of income so that your right tax bracket can be determined for the year. Usually, the returns are filed by filling out forms provided by the IRS. One of these forms is the Form 1040, used for personal filing. In most cases though, to bring transparency in the filing procedures, returns are filed by the company a citizen works with. The form a company uses to file returns on behalf of their employees is most commonly the Form W-4.

Tax Debt

Tax Debt is the accumulated amount of tax money a citizen failed to pay to the state within a particular time period. Unpaid tax debts are supposed to be resolved or settled with the relevant federal and state authorities in a timely manner; not doing so can result in penalizing the tax defaulter, which could also extend to jail time and property confiscation in extreme cases.

Tax debts are not an unlikely occurrence though. According to an estimate, about 17% taxes are left unpaid or unresolved every year in the US for a variety of reasons. Some of the most common causes of tax debt have been discussed below:

  • Unfiled Tax Returns– Filing the correct amount of tax returns is your first step towards payment of taxes. A failure to file tax returns is one of the most common reasons why so many citizens are found to be tax debtors and defaulters. Filing returns, in simple terms, means to report your income. Wrongful reporting, which may include underreporting, will not be left unnoticed by the authorities for long. In some cases, wrongful filing occurs because of sheer ignorance, which can be settled with the authorities to minimize the penalties. But if it is intentional, you may find yourself in hot water sooner or later. There are a few conditions related to income level in the context of tax returns. The IRS has defined certain income levels on which it becomes mandatory to file. If you earn below those income levels, you are not required to file tax returns.


  • Incorrect Withholding by the Employer– As discussed briefly in the beginning, some companies file returns on behalf of employees and deduct the corresponding amount from their salaries. A tax debt may accumulate if your company has been withholding less than the required amount of money from your salary to be paid as tax. Since you are relying on them for the resolution of these matters, you may remain ignorant from the fact that you have become a tax defaulter. It is therefore better to keep checking on the relevant department of your organization on regular intervals, so as to know beforehand if any such discrepancy exists.


Related to this is another reason where the employees claim unjustified exemptions from the IRS through their employee withholding forms. Since it happens through an indirect channel i.e. through the company the employee works in, the debt accumulation due to repeated exemption claims may not immediately come to the notice of the employee.


  • Financial Crisis– Some citizens may simply be facing financial crisis which makes them unable to pay their due amount in taxes. Unforeseen circumstances such as health issues accumulating medical bills and sudden employment loss among other reasons can cause citizens to not pay their taxes. Although these are legitimate reasons, you must still follow up with the relevant authorities to find solutions so that the State, at an official level, is known to your situation and does not treat you like just another irresponsible tax debtor.

How to Get Tax Debt Forgiven

The IRS has outlined a number of solutions that can get your tax debt forgiven; partially in most cases unless the situation justifies one hundred percent forgiveness. Although the IRS has collection initiatives whereby a debtor has his property and other assets seized to compensate for taxes, if the officials see that this collection process will push the debtor into a long standing financial crisis, they will put debt forgiveness options in front of you instead of taking hard measures. Therefore, the IRS collects only as much as you can afford to pay in taxes. Your current financial standing, in terms of bank balance and employment status, is the primary parameter while considering tax debt forgiveness options for you. Hence, your financial condition needs to be stated and proven with clarity with the help of relevant documents to expedite the process of debt forgiveness.

The following options, as described in detail by the Internal Revenue Service, are available to get your tax debts forgiven.

Complete Forgiveness Options

In order to be eligible for full forgiveness of your outstanding debt, the only option is to file for bankruptcy, which should ideally be the last resort. Before you file for it, you should know that it impacts your future transactions such as ability to book automobile or housing and even credit reputation. So unless there is absolutely no other way out of debt, only then you should consider filing as bankrupt. Since it is a complicated, time consuming and expensive process, it is generally suggested to thoroughly go through other options before making this decision.

Go through these considerations to file for bankruptcy as a way of debt forgiveness;

  • Bankruptcy stays documented on your credit history for about a decade.
  • Filers are, in most cases, obligated to go through a 6 month period of credit counseling which involves closely weighing all other options of debt forgiveness other than bankruptcy.
  • The number of credit counselors qualified to do this job is quite small; which is why they offer online services as well so that debtors may easily to consult them.
  • Although not compulsory, it is highly suggested that you hire legal help in the form of an attorney or tax lawyer before filing.
  • Bankruptcy cases are dealt with in the federal courts and may cost you a lot in traveling back and forth, in addition to the court fees.

There are quite a few types of bankruptcies laid down by the authorities, out of which Chapter 7 is the most commonly used for full writing off of debts. It is most commonly used by individuals and married couples.

Chapter 7 Bankruptcy

About 70% of bankruptcy cases are dealt under Chapter 7. Most of the debts are forgiven completely and the filer does not remain obligated to repay any more. The authorities, in exchange of complete forgiveness, may resort to selling some of your assets to compensate the entities affected by your inability to pay taxes.

How much of your assets you are allowed to keep depends on the rules of the State you live in. You are still eligible to receive all the social security benefits promised by the State to the citizens.

In case of income tax debt, there are some conditions that must be met for you to be able to have a successful filing for bankruptcy, asking for full forgiveness of debt.

  • The date you filed the respective returns which you were unable to pay must have been at least 2 years before the date you filed for bankruptcy.
  • Any kind of intentional tax dodging and fraudulent practices must not have been committed by you when you filed tax returns.
  • The IRS must have looked into the due taxes in detail at least 8 months before you filed for bankruptcy.

Partial Forgiveness Options

Partial forgiveness plans are comprehensively defined by the IRS, which make it easier for the debtors to repay a certain percentage of their unpaid taxes under a structured plan agreed upon by both the debtor and the credit authority.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is for those who have higher income levels, making them ineligible for Chapter 7 and who do not wish to let go off their assets completely. Under Chapter 13, you are required to pay a certain percentage of your debt while the rest is written off. There is, though, a debt threshold in this case and your total debt amount must be under this threshold for you to be eligible. Since this threshold is regularly updated, it’s better to meet with a credit counselor or relevant lawyer to get the relevant information. Since Chapter 13 does not write off all the debts, it entails comprehensive repayment plans, spanning over a specific number of years, suited to the debtor. Adherence to this plan is important. If you are unable to pay according to the plan in the defined time frame, resorting to Chapter 7 for full forgiveness is the next best option.

‘The next two options; Offer in Compromise and Installment Agreement, fall under the Fresh Start Program, initiated by the IRS to make tax repayments and securing written off debt agreements easier, especially for individuals as well as small businesses. This initiative was started in 2008 and what’s discussed in the next two sections was included in 2012 as an expansion to the actual program’.

Offer in compromise

Offer in Compromise is kind of a negotiation debtors carry out with the Internal Revenue Service. Its main aim is to get a major chunk of the debt amount forgiven or written off by mutual understanding with the IRS. What’s left after the agreed forgiven amount is what you owe them. There are two options for its repayment.

  • Short Term Offer in Compromise which entails a five month period in which the left off debt has to be repaid.
  • Second is the PPIA, the Partial Payment Installment Agreement, which is a long term plan spanning over a number of years making it easier for the debtor to pay.

Your eligibility to apply for an Offer in Compromise is generally determined on the basis of your expenses, income level, value of your assets and the ability to pay the debt. When you submit your application, you can preemptively start following a payment plan in case your application is accepted. One of the payment options is the Lump Sum Cash which requires you to submit 20% of the debt amount along with the application. If accepted, you can keep paying in installments, usually five or less. The other option is the Periodic Payment which requires submitting an initial amount with the application and keep paying on a monthly basis until your offer is reviewed and accepted by the IRS.

These payment options allow the debtors to start paying without having to wait for an acceptance. Once accepted, it can continue and if rejected, other repayment plans can be followed. For more details regarding the OIC, visit here.

Installment Agreement and Tax Lien

Installment Agreement is the simplest one, also called the Payment Plan. In this, you agree upon a debt amount to be paid, which is lesser than what you actually owe. The time in which you will repay is predetermined which you have to adhere to.

In case it takes you longer than the decided and agreed upon timeline, you will have to bear fees for structuring a new long term plan. The fee is close to a $100. The maximum that the Installment Agreement allows is four months; after which the additional fee will be applicable to draft a new plan. In order to apply for such a Payment Plan, you have to fill up and submit Form 9465 to the IRS. These conditions are applicable to debts under $50,000. For bigger debt amounts, debtors may be required to provide important financial statements and the form to submit for such Installment Agreement is either the 433-A or 433-F.

Under the tax lien program, the IRS allows a debt threshold of $10,000 before issuing a lien notice. For debtors that repay their taxes will have the notice withdrawn. In other cases, the debtors that are currently following a partial repayment plan such as an Installment Agreement discussed above will also have the notice withdrawn. To do this, the Form 12277, called the Application for Withdrawal, has to be submitted before the IRS.

Debt Consolidation

Debt consolidation, as evident through the term, implies that a number of your debts, owed to multiple creditors, are combined or consolidated into a single payment. There are various benefits that you can gain from debt consolidation. Some of them include lower interest rates, streamlined debt payment and a fewer number of monthly payments among many others.

This is an indirect approach of getting loans forgiven. The debt itself is not actually written off but the costs associated with making multiple payments each month are significantly lowered which makes it easier for you to repay. The interest rates of each payment you make to a separate creditor are significantly higher than what you will pay to a single source. This is where the Debt Consolidation Plan is centered.

Debt consolidation includes a variety of differently structured plans such as the Debt Management Plan, Debt consolidation Loans and Debt Settlement Plans. The in-depth details of these repayment plans can be found here.

Temporary Delay

If you wish to get your debts forgiven only on a temporary basis because of what you believe is a short term financial crunch, Temporary Delay is the best option to go by. In this case, your deadline for payment maybe extended by the IRS, only after looking into sufficient evidence that your financial hardship is actually short term.

Temporary Delay buys you a sufficient amount of time in which you can sort out ways to repay debts or look for options to get the debt forgiven on a plan. There is though a monetary setback that you may have to face in the form of extension penalty charges apart from the debt amount. Therefore, it is important to evaluate all other available options of repayment and partial forgiveness before you resort to Temporary Delay, saving you from bearing extra costs.

Final Word

As a tax debtor, you have a multiplicity of options to choose from that can be adjusted to your requirements, current and future financial projections and what is practically possible for you. It is important to be vigilant while selecting what you think is best. It is only understandable that a debtor who is resorting to debt forgiveness options is already in tight conditions; which makes it all the more crucial to choose smartly so that you can avoid further trouble.

The central factor in getting the tax debt forgiven is to keep the relevant authorities in the loop. It is only when you seek proper legal advice, approved by the State bodies, that you will be able to get yourself out of the quandary. So before you even start to think about dodging the authorities regarding your tax debts, keep in mind that your long term benefit is only in being clear and transparent about your finances, so that the right kind of help can be given to you in the context of debt forgiveness.



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