Get Rid of Unpaid Taxes Without Losing All of Your Assets

It is nice to have a retirement account with a significant balance. It is also nice to have a significant amount of equity in a home. It can be difficult to get tax relief from the IRS for unpaid taxes if you have one or more of these assets.

Reasonable Collection Potential

The IRS factors the value of these assets in its calculations for whether it should accept your offer in compromise or the amount of the monthly installment agreement it will accept. The IRS calculations look at your reasonable collection potential. This is the amount the IRS thinks it can collect from you. It consists of your income less certain very minimal living expense allowances and the discounted net value of your assets.

If the discounted net value of your assets is greater than your tax liability, the IRS will expect you to fully pay your tax liability. This may not be an acceptable option if the assets consist primarily of your retirement account or your home, as you probably do not want to lose your ability to retire or to have a home to live in.

Bankruptcy Fresh Start

Bankruptcy may be a better option if you qualify and if the tax debt is able to be discharged in bankruptcy. Retirement accounts and equity in homes are generally exempt from creditors. So you may be able to keep these assets and still discharge your taxes in bankruptcy.

There are quite a few rules here, but generally, tax debts that were reported to the IRS on tax returns filed three years ago and for tax years that are three years or older are dischargeable in bankruptcy. If you qualify, your taxes may be forgiven and you may be able to keep your retirement account and home equity intact. This can have the added benefit of being able to discharge other debts in bankruptcy at the same time.

It should also be noted that the damage to your credit score for filing bankruptcy may be about the same as the IRS’s notice of federal tax lien showing up on your credit report.

While there is a stigma associated with filing bankruptcy, it may be the best option for obtaining tax relief in some circumstances.