How to Get Tax Debt Relief

June 18, 2019

Tax debt can occur for any number of reasons. Certain types of workers are more likely to slip into tax debt than others. Those who work as independent contractors, for instance, commonly fall into tax debt because they calculate their tax liability incorrectly. Independent contractors are those who receive Form 1099 at the close of the tax year. Unlike employees, independent contractors do not have tax withheld automatically at every pay period. Independent contractors are in charge of calculating and withholding their tax burden on their own. This extra responsibility can often be daunting for such people. Consequently, it’s very common for these individuals to accumulate back tax debt. The same is true for small business owners. What’s more, in some cases, employees will accumulate tax debt because they either intentionally or accidentally have too little tax withheld. Though the reason can vary, tax debt is an extremely common phenomenon. 

Not every person who accumulates significant tax debt can manage this debt with their other financial obligations. In some cases, tax debtors need to seek relief. There are myriad specific reasons as to why someone may need to seek relief for tax debt. However, two general reasons underly every scenario in which debt relief needs to be sought. In this post, we will go over these tw general reasons for seeking relief for back tax debt. If either of these things apply to your situation, you may want to consider seeking relief. 

Scenario #1: Seek Relief When the Tax Debt Becomes Too High 

One general reason why relief for tax debt may need to be sought is the size of the debt. Let’s suppose that a taxpayer is keeping up-to-date with all tax liabilities at a given point. But then after that point, this taxpayer suddenly acquires a large tax burden. In such a situation, this burden may easily become unmanageable. For instance, in a given year, a taxpayer may perform a transaction which results in an unusually high tax liability. For instance, a taxpayer may sell a large quantity of stock or sell an investment property. As a result of this unusual transaction, the taxpayer may need to seek relief in order to manage their debt. 

Let’s look at a specific scenario. Suppose a taxpayer conducts a 1031 transaction and the relinquished property had significant mortgage debt. Let’s assume that the property was worth $1 million and that the mortgage was $150,000 at the time of the sale. And then let’s also assume that this taxpayer only acquired a property worth $900,000. In this case, the taxpayer would be left with a tax liability based on the mortgage boot of $100,000. This is true even though the taxpayer would not receive any cash from the transaction. In this situation, the taxpayer may be stuck with a tax burden of around $35,000. In such a scenario, this taxpayer might decide that an installment agreement would be a desirable option. Even though the taxpayer may have significant assets, an installment plan might be needed in order to make the debt manageable.  

Again, it’s possible to imagine all sorts of different scenarios in which a very high tax burden might necessitate relief. Whenever debt becomes too high, a taxpayer may need to seek out an installment agreement, OIC, or bankruptcy

Scenario #2: Seek Relief When Financial Circumstances Change 

In addition to a very large debt burden, relief may also be necessary if a taxpayer’s financial condition changes. This is very common phenomenon. Very often a taxpayer’s who’s been able to keep up with their tax debt will suddenly suffer a drop in income. For instance, a job loss or medical emergency will oftentimes impact a taxpayer’s ability to meet their tax debt obligations. In these cases, seeking debt relief is a very understandable course of action. The sudden drop in financial status creates a problem for meeting preexisting debt payments. It’s not uncommon for a taxpayer to seek relief in order to address such a problem.  

Consider this scenario. Let’s suppose that a taxpayer reaches the end of the tax year and faces a tax liability of $10,000. But then by the time that the taxpayer ends up filing his or her return, the taxpayer loses his or her job. Normally, managing the debt would not be an issue, because the taxpayer would have the means to address it directly. But given the job loss, the taxpayer may now need to request either an installment agreement or submit an OIC. This is particularly true if the taxpayer already has dependents or other preexisting financial responsibilities. To sum up: a significant change in financial status is a primary reason why relief for tax debt may need to be sought. 

Call Us For Assistance!

Here at Mackay, Caswell & Callahan, P.C., we are involved with back tax debt on a daily basis. We’ve dealt with countless situations involving back tax debt and so we’re intimately familiar with this issue. We help our clients find the type of relief which best suits their particular circumstances. Seeking relief for IRS tax debt requires specialized knowledge and expertise. It is imperative that those with back tax debt procure help from a qualified tax attorney. Hiring a qualified attorney will ensure that all rules are followed correctly when relief is sought. If you have a tax debt issue, contact one of our top New York City tax attorneys today for assistance. 

Image credit: Marco Verch 

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