Can you relieve tax debt?

Of all the questions I get asked, that's one of the most popular (the other starts "Can I deduct...?")

In today's economy, debt settlement is a big issue, and tax debt is no different. If you've failed to file a return, that debt can be quite large. There's failure to file penalties, failure to pay penalties, late payment penalties, negligence penalties...the list goes on and on, and it's not uncommon to owe more in penalties than you do in tax. And let's not forget interest, another form of piling on. While the IRS rates are currently low (generally 4-6% in recent years), that's no guarantee that they will stay low.

So what can one do if you have tax debt, a federal tax lien or a state tax lien?

There are firms out there which offer to settle your IRS debt for 'pennies on the dollar,' but can they?

The answer: Maybe, but don't bet on it. And like debt settlement companies, you may find that you've paid them, but gotten no benefit.

What are your options, then?

First, know that if you do owe the IRS or the state, the debt won't go away. The IRS has 10 years from the date the tax is assessed (read: from when you file your return) to collect the tax. States, on the other hand, may not have a limit at all, as one California taxpayer found out to their chagrin - a $600 debt from 1982 had grown to several thousand by the time the taxpayer went to try and settle up, and California wasn't willing to negotiate (no surprise, considering their financial condition).

Second, most states and the Federal government have tax relief programs. Some, like Wisconsin, reward non-filers for coming forward voluntarily by waiving penalties and filing requirements, but you often have to do some work to find those options. Others may have payment plans or compromise plans, but with restrictions (for example, California requires direct debit).

Third, coming forward voluntarily is almost always better than waiting for the government to find you. For example, California has a stiff 100% penalty for participating in an abusive tax shelter (Summit Research & Blackbriar Investments, for example) if they contact you about it; if you contact them, you pay considerably less.

Fourth, while an offer in compromise (the 'pennies on the dollar' option) may be available, it's not a given. Anyone who promises you that they can settle your debt for pennies on the dollar is misleading you. The decision rests in the IRS or the state's hands, not yours, and certainly not a third parties'.

In short, if you have tax debt, you need competent advice.

I can help. In California and states other than Illinois, call (909)276-4829 to set up a consultation to discuss your options; in Illinois, call (708)415-6172. Don't delay - each day you wait increases the amount you owe.