Tax Debt Relief Via Bankruptcy in Pennsylvania
Over eight million American people have problems with tax debt. In Pennsylvania alone, over 400,000 people owe between three and ten thousand dollars in back tax to the IRS. This has ensued in some questionable tax reform plans to provide relief for state residents. The most recent of these is a proposed state tax on alcohol sales which is meant to help raise funds that can be utilized for government debt reduction programs. However, this may result in negligible benefits for individuals, and is more likely to settle state deficits first. For Pennsylvania residents with income tax debt, an attorney may offer the most helpful option for understanding tax law and repaying the IRS in a reasonable fashion.
A Norristown PA bankruptcy lawyer can assist in weighing options and finding the best solutions for an individual’s budget without any mistakes that could cause further problems. In general, there are several major methods of overcoming back taxes and income tax debt:
- Paying by installment
- Paying by partial installments
- Claiming taxes as currently uncollectible
- Filing for bankruptcy
- “Offer in Compromise” (OIC)
- Applying for federal tax relief
Each of these methods has pros and cons. A tax lawyer can help to navigate through possible scams and find realistic ways of reducing the weight of back taxes.
Tax Payment Options
Paying through installment is one of the more popular ways to overcome tax debt. The full amount that is owed is broken down into a certain portion that is paid to the IRS each month. Once the agreement for an affordable payment is reached, these funds can be drawn as wage garnishment or as a direct withdrawal from assets. This method, however, may still be subject to penalties, and can be subject to interest. An attorney can generally negotiate reasonable terms, but there is often an added cost to taking this approach.
Partial installments are an aspect of the Tax Debt Relief Act. This newer version of installment payments allows for the tax debt to be paid off over a long term schedule. It also allows for a lesser amount to be repaid than what was originally owed. With this method, any future tax refunds will be applied to the installments and a default on this agreement can lead to severe fines. Both installments and partial installments can affect credit scores, and the ability to rebuild credit fully may not be an option until the agreement is paid in full.
Claiming taxes as uncollectible is also an agreement with the IRS that allows for more time to gather the necessary fees. This is often negotiated between a tax lawyer and the IRS, but any non –liquid assets, such as a principal residence, are considered in setting terms. Making an uncollectible claim can afford about a year’s period of grace. If the money is not available at the end of the agreement term, then further legal action against the debtor may be taken. This could be further fines, but could also include jail time for the federal offense of tax evasion.
Filing for bankruptcy is one of the most common methods of avoiding payment on back taxes but can become a scam if approached improperly. Law firms may handle both the terms of the bankruptcy and filing the notification with the IRS. While this option is an immediate solution to paying debts, it has a long lasting negative effect on credit ratings. It also does not make the tax debt entirely disappear, although liquidated assets will go towards payment. Any funds or properties that are acquired after the claim for chapter seven will still have liens put on them until the back tax is completely resolved. This can make rebuilding after filing for bankruptcy a difficult task.
An Offer in Compromise is another agreement that the IRS can be willing to make with the debtor. The benefit of the OIC is that it will allow for the payment of lesser amount than the original back tax, but it requires lump sum payments. An OIC is a shorter term program than either installments or partial installments, but still allows for tax debt to be paid over time. OICs will still impact credit scores, but offer the opportunity to rebuild credit faster. Any liens that the IRS places on principal residence, assets, and property are released as soon as the agreement is fulfilled. An OIC does have strict qualifications, and not everyone is eligible to take this path.
Federal tax relief plans differ for individuals and companies. In areas that have been hit by environmental hardship and natural disasters, residents can apply for exemption status on funds that are acquired for reconstruction. This also applies to any Pennsylvania residents who took in displaced individuals from Katrina, the Oklahoma floods, or related events. The act of charity can qualify households for a reduction of their income tax. Reforms are also in place based upon participation in the Affordable Healthcare Act, and this can extend to companies as well as individuals. An added tax relief plan for companies in Pennsylvania allows that debts incurred through client failure to pay will be deducted from taxes that are owed.
There is a statute of limitations on how long tax debt remains an issue. The IRS has ten years to collect back taxes. Some income tax relief scams will try to wait out the statute in order to dissolve payment. However, not filing a return or postponing payment to exceed the statute is a federal crime. Using an attorney to create a legal and manageable way to help resolve debt issues allows for individuals, and the American economy, to rebuild.