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Information about all aspects of finances affected by a serious health condition. Includes income sources such as work, investments, and private and government disability programs, and expenses such as medical bills, and how to deal with financial problems.
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Summary

The IRS is the most aggressive, powerful debt collector there is. If you have not filed tax returns, file them. A serious illness is no excuse for not filing. 

If you receive notice from the IRS that you owe money, do not ignore it. Ignoring the IRS will only prolong and worsen your situation.

This article deals with the situation in which you owe taxes, but cannot readily pay them. Following is a brief summary. For more about each subject, see the other sections of this article.

There are alternatives for handling tax debt other than paying it all at once, including an "Offer In Compromise" and asking for a "Delay." In this situation, your diagnosis itself might make a resolution of your tax problems easier. Whatever method you use, you can also ask for a waiver of penalties.

When you speak with the IRS, there are guidelines that will make it more likely that your experience will be positive - or at least that you won't shoot yourself in the foot.

If you can't reach agreement with the IRS, appeal.

Regardless of what method you use to deal with the IRS, we suggest that you always be honest. By coming clean about what you owe, describing your ability (or inability) to pay, and communicating the fact of your illness, you will be able to resolve your tax problems with much less stress and a much better outcome.

For more information, see:

Alternatives For Handling Tax Debt

You actually have more ways of settling a bill with the IRS than you might think. Following are the alternatives:

Pay the Bill

Consider paying the bill in full. If you do not have the cash, you might be able to borrow from a bank or online, family or friends, obtain cash from your assets without selling them , (including obtaining money from a life insurance policy) and use the proceeds to pay the bill. While this is often the best option for those who can do it, read through the alternatives below before making a decision.

Get an Installment Payment Plan

If you think you will be able to pay your bill over time without jeopardizing the amount of money you need to take proper care of yourself, including your health expenses, you might consider this option. The pluses and minuses of a payment plan are:

Advantages of using an installment payment plan:

  • You have an automatic right to an agreement if you owe $10,000 or less and have a clean record with the IRS.
  • You can apply by phone.
  • Unless you owe the IRS more than $10,000, you won't have to provide the IRS with information about your finances.
  • Once a plan is in place, the IRS will be off your back, unless you miss a payment.

Disadvantages of using an installment payment plan:

  • You'll have to pay off the balance in full within 36 months.
  • Both interest and penalties will continue to accrue at the rate of 12% per year. There is a fee to set up an agreement.
  • If you haven't filed all past due tax returns, you won't be eligible for an arrangement.
  • If you miss a payment, or don't file a future tax return, the Installment Agreement could be revoked immediately. (In reality the IRS will usually wait for a period of 30 • 60 days before revoking the agreement, giving you a warning and chance to reinstate it.)

If you are on a payment plan and your financial or medical condition change for the worse significantly, tell the IRS. You may be able to renegotiate your arrangement or arrange for an "offer in compromise" or "temporary delay" (see below). Regardless, if you can't make a payment, call the IRS immediately. If you don't, the IRS could take immediate steps to seize your assets.

To request an installment plan, fill out an installment agreement request at www.irs.gov/pub/irs-pdf/f9465.pdf offsite link.

Negotiate An Offer In Compromise

If you have the resources to pay some, but not all of your tax bill, consider asking the IRS for an Offer In Compromise. An Offer in Compromise is when you offer to pay the IRS less than the total you owe to pay your bill completely.

If the IRS accepts your offer, the IRS will wipe your slate clean of the remainder of overdue taxes. For example, if you owe $15,000 and the IRS accepts an offer of $5,000, you will no longer owe the remaining $10,000.

To receive an Offer in Compromise, you will have to submit financial statements showing one of the following to the IRS:

  • Doubt about your ability to pay now or in the foreseeable future.
  • Doubt about whether you do in fact owe the tax bill.
  • That you have an economic hardship or other special circumstance that may allow the IRS to accept less than the total balance due. Telling the IRS about your health condition will make your Offer in Compromise more likely to be accepted.

According to at least one tax expert, the key is how much you can pay - not how much you owe.

To apply for an Offer in Compromise, you must first submit:

When you complete the forms, make sure your answers are correct,  paperwork is complete and that you meet any deadlines. Otherwise your offer will be rejected.

It is helpful to note that once you file an Offer in Compromise, the IRS generally stops its collection activity. This means that if the IRS is about to garnish your paycheck, filing an Offer in Compromise will put generally the garnishment on hold.

NOTE: Be careful about using an Offer in Compromise. If it is rejected, the financial disclosures you made to the IRS give it all the information needed to speed-up collection efforts.

Ask for a "Temporary" Delay

Efforts to collect your debt may be temporarily delayed if the IRS determines that you are currently unable to pay. The IRS temporarily changes your status to "uncollectible." The IRS will then periodically revisit your situation to see if your financial condition has improved. A change to "uncollectible" is most likely to occur if you are out of work or if your income is very low. Penalties and interest will still be charged, however.

If your medical condition is serious and you tell the IRS about it, your chances for obtaining a delay are much better. Kevin L. called the IRS and said that he couldn't pay because he had stopped working because of the effect HIV/AIDS was having on him. After a brief check with her supervisor, the IRS representative told him they wouldn't bother him for a year and wished him a happy Easter.

File Bankruptcy

You can also file bankruptcy to erase tax debts or force the IRS to accept a more agreeable payment plan. The best thing about filing bankruptcy is that it gives you an automatic stay. This means that once you file, the IRS cannot issue a tax lien or seize your property. However, because of the serious implications of bankruptcy and its affect on your credit rating, you should consider this step very carefully. To learn more, see Bankruptcy.

Chapter 7 bankruptcy, the kind of bankruptcy in which you wipe out your debts (see Bankruptcy for more information), will wipe out your tax debt only if the following are true:

  • You did not file a fraudulent tax return or willfully try to evade taxes, such as by using a false social security number.
  • The tax return on which you owe was originally due at least three years before you filed for bankruptcy. For example, if you file bankruptcy in May of 2013, taxes you owe from your 2009 return (which was due April 15, 2010) will qualify because it will have been three years and one month between the due date and the date you file bankruptcy. Taxes due for periods after your 2009 return will not qualify.
  • You filed the return at least two years before filing bankruptcy. Taxes owed as a result of returns you file less than two years before the date you file bankruptcy can't be included.
  • The tax was assessed at least 240 days before you filed your bankruptcy petition.

Alternatives To Consider If You Cannot Reach An Agreement With The IRS

If you cannot reach an agreement to have your bill paid, or if you have an emergency situation, consider one of the following:

The Taxpayer Advocate System

The Taxpayer Advocate Service is an independent IRS program set up to assure that your tax problem is properly handled.

If you are suffering hardship, facing a lien, levy, or seizure of property, facing significant legal costs, or have not been getting promised responses for the IRS, you can apply for assistance from the advocate by Completing Form 911.

You can get the form at www.irs.gov/pub/irs-pdf/f911.pdf offsite link, or ask an IRS employee to complete one on your behalf over the phone. To get more information about this service, including your local advocate's address, phone and fax number, refer to Publication 1546 "The Taxpayer Advocate Service of the IRS offsite link"

Appealing a Collection Process

If you receive a Notice of Federal Tax Lien or a Notice of Intent Levy, you can file an appeal at any time using Collection Due Process. Under this process, you can request a hearing. If you don't agree with the outcome of the hearing, you can file a court appeal. To start an appeal under the Collection Due Process, complete form 12153, Request for a Collection Due Process Hearing.Send it to the IRS at the address shown on your lien or levy notice within 30 days. You can download the form at www.irs.gov/pub/irs-pdf/f12153.pdf offsite link.

You can also request an appeal under another IRS program called the Collection Appeals Program. You can use this process if you receive a levy or lien notice, if the IRS seizes your property, or if it denies or terminates an installment agreement. However, unlike with the Collection Due Process Hearing, you won't be able to go to court if you don't agree with the appeals' decision. To use the Collection Appeals Program, complete Form 9423, Collection Appeal Request. You can get it at www.irs.gov/pub/irs-pdf/f9423.pdf offsite link.

For more information about your appeal rights, get IRS publication 1660, "Your Collection Appeal Rights." Like the other IRS publications, it is available online. See www.irs.gov/pub/irs-pdf/p1660.pdf offsite link.

What To Do If You Have Not Filed A Tax Return That You Were Supposed To File

Many people with illnesses stop filing returns because they expect to die before having to face the consequence. Some people just don't file period. Whatever the reason, you should consider filing any past due returns immediately. A clean "tax bill of health" will remove stress from your life and is a cornerstone of a sturdy financial house/ Among other reasons, owing taxes negatively affects your credit rating. (For a discussion of the importance of credit to people with a health condition, see The Importance Of Credit.)

By filing past due returns now, even if you don't have the money to pay the taxes you think your returns will show you owe, you'll also stop the accumulation of late filing fees (even if you don't stop interest accumulating.) Late filing fees can be up to 25% of the tax due. If you don't file, there is also the possibility that criminal charges will be filed against you.

At the least, make sure your returns are filed for a minimum of the past six years. We mention six years because the government cannot criminally charge you for failing to file beyond that time. The IRS also frequently purges its computer files after six years. However, be advised that there is no limit to the time in which the IRS can audit you, collect taxes, or assess civil penalties for not filing.

Once you do file a return, the audit time limit decreases to only three years, (unless you've underreported your gross income by at lest 25%).

If there is a tax refund due you for any of the past years, you may lose it. If you don't file a return within three years of its due date, your right to a refund will be forfeited. Note, however, that the limitation period on refund claims is suspended if the reason for the delay in filing is that you have an illness that is expected to result in death or last for at least the next 12 months.

What To Do If You Receive A Notice From The IRS That You Owe Money

The IRS starts its collection process with a computerized bill no matter whether it believes money is due from returns recently filed, old returns not filed, or an error in your return. Ignoring these bills is a big mistake.

If you can pay the bill: If you can pay the bill right away without undue hardship, do so. Be sure to contact the IRS as soon as possible.

If you cannot pay your bill right away:

  • Contact the IRS as soon as possible. Before calling the IRS, it is suggested that you know your options. Read the rest of this article and IRS Publication 594, "What You Should Know About the IRS Collection Process." The publication is usually sent with your invoice. The publication is also available at: www.irs.gov/pub/irs-pdf/p594.pdf offsite link.
  • Read about the alternatives for paying by reading Alternatives For Handling Tax Debt

If you think your bill is wrong: Call the IRS number on your bill before the due date indicated, or visit your local IRS office. Bring the bill, copies of any records, other tax returns, canceled checks, etc., that will help explain why your bill is wrong. If you still disagree with the IRS' position, you can appeal. Read our section on appealing an examiner's decision in Audits For Everyone.

If you ignore the bill: If you don't pay your bill or contact the IRS to explain, the IRS can ask you to sell or mortgage your assets or get a loan. If you still don't do anything, the IRS can seize your bank account, levy your wages, put a lien on your assets or seize other income or assets.

A levy is a legal seizure of your property. The government actually takes it away.

By filing a lien, the IRS takes a security interest in your property much like the bank takes a security interest in your house when it gives you a mortgage. You can't sell or transfer the property without first satisfying the debt.

How To Ask For A Waiver Of IRS Penalties

Regardless of which method of handling your bill you choose, you can ask the IRS to cancel penalties to reduce your bill. You'll have to convince the Examiner that you had a good excuse for failing to follow the tax law. Telling the IRS about your illness could be such an excuse.

You can ask anyone at the IRS to cancel a penalty, even if you've already paid it. If a personal plea doesn't work, it might be more effective to file Form 843, "Claim for Refund and Request for Abatement, which is available at www.irs.gov/pub/irs-pdf/f843.pdf offsite link.

How To Speak With The IRS Effectively

If you're not going to pay the bill right away, you will have to contact the IRS. Here are some tips on speaking to the IRS in an effective manner:

Tell the IRS about your illness. Despite the intimidation that people often feel when confronted by the IRS, remember that the person you're dealing with one-to-one is human. It's very possible that the person will be sympathetic to your situation and willing to be more flexible than he or she otherwise might be. You're not asking for special treatment -- just relaying the fact of your illness.

Always get the name of the person with whom you are speaking at the beginning of your phone call.

Don't hesitate to ask for a supervisor if your questions are not being answered to your satisfaction or if the representative is rude.

Don't give bank account and employment information to the IRS over the phone.

Request that your file be sent to the local district office if you prefer to meet with someone in person.

Never lie to an IRS employee about your assets or anything else: it is a crime.