When you find yourself in the situation of owing back taxes to your state’s department of revenue and taxation, these back taxes can place a significant burden on your finances. The state can impose levies on your bank accounts, place liens on your property, and garnish your wages. For each day that you remain in tax debt penalties and interest charges are added to the amount that you owe.
Facing up to your problem is the first step. You need to communicate with your state’s department of revenue and taxation. Representatives of this department are generally willing to work with you to resolve your liability.
Many tax authorities follow procedures similar to those of the IRS for collecting taxes. You can deal with your state’s tax department yourself, but you may want to consider seeking professional assistance on various ways to settle your state tax debt.
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Paying your taxes in full and on time is one of the best and most cost-effective ways to avoid penalties.
You could consider requesting a bank loan if your credit status is good. The interest charges may be lower than the penalties and interest fees that your state’s department of revenue and taxation would add to your debt on a daily basis. However, only take out a loan if you know that you can afford to make the payments. Otherwise you will simply be delaying your debt problems.
If you own your house, you may be able to release some equity by refinancing your property. This decision is not one to take lightly, and you should weigh any debt relief advice you receive to find out if this option would be the best one for you.
When none of these options are available to you, you need to look at other ways to settle your tax debt or stop the collection process. These options include the following:
Your state’s tax department may agree to allow you to pay off your tax debt in installments. If your debt is less than $50,000 and the state considers you able to repay the full amount, the process is fairly straightforward. You can set up fixed monthly direct debit payments for up to six years. without providing any further financial information.
If your debt is more than $50,000, your state’s tax department will require a detailed financial statement providing evidence that you’ll be able to pay off the debt in a fixed period of time.
You may qualify for a partial payment installment agreement which allows you to pay back less than the full amount of the debt in monthly installments. The tax department will undertake a detailed review of your financial status and expect you to make monthly payments until the statute of limitations expires, a period which could be 10 years or more.
Even when you have started making your payments, interest will be charged on the remainder of the debt and compounded daily. You will also have to pay penalties on the unpaid portion of the debt. You should try and pay as much as you can at the beginning to avoid higher charges.
An offer in compromise allows you to pay off your tax debt for less than the amount you owe. Only a small proportion of offers in compromise are accepted as your state’s tax department will grant this condition only under specific circumstances.
When you make an offer in compromise, the department will examine your financial situation. Representatives from the department will review your expenses, income, assets, and any equity to identify how much debt you can realistically settle.
If you are clearly not eligible for an offer in compromise, and you submit one, it may be considered frivolous and the state could impose a penalty. Only submit an offer if you can’t pay your debt in full. You will be expected to pay off the offer in compromise within two years. Failing to do so would also incur penalties.
When you file a joint tax return with your spouse, you are both jointly liable for tax debt. However, you may be able to apply for innocent spouse status if you can prove that your spouse caused your tax debt without your knowledge.
It is not always easy to prove that you had no knowledge of your spouse’s actions, especially if you added your signature to the tax return. You need to demonstrate to the state that your spouse did one of the following without telling you:
Innocent spouse relief is generally claimed by people who have separated from their spouse. If you possibly benefited from the misfiled tax return, you are unlikely to be accepted.
Ignorance of an act is not always an excuse. Even if you have indicated that you didn’t know what your spouse did, you may still be responsible for the tax debt.
When your state’s tax department believes that it can’t reasonably expect to collect your debt, representatives can assign the debt status as currently not collectible (CNC). Reasons you may qualify for CNC status include the following:
CNC status doesn’t stop penalties and interest from accruing on your debt. If your financial situation improves, you will be liable for a larger tax debt.