Beyond the Basics: Lesser-Known Tax Relief Avenues and Strategies

When taxpayers find themselves struggling with IRS debt, common solutions like Installment Agreements or an Offer in Compromise often come to mind. While these are vital programs, a deeper dive into the tax code reveals additional, sometimes overlooked, avenues for relief that can be crucial in specific circumstances. Exploring these options can provide tailored solutions for individuals facing unique challenges, from spousal tax burdens to unexpected financial setbacks that impact the ability to pay. Understanding the full spectrum of relief can make a significant difference in achieving a favorable resolution with the IRS.

Innocent Spouse Relief

Tax law generally holds both spouses jointly and severally liable for taxes due on a joint tax return. This means the IRS can collect the entire amount from either spouse, regardless of who earned the income or claimed improper deductions or credits. However, Innocent Spouse Relief provisions are designed to alleviate this burden for a spouse who was unaware of errors on a joint return that resulted in an understatement of tax. There are three types of Innocent Spouse Relief:

1. Innocent Spouse Relief (Traditional): To qualify, you must show that you filed a joint return which has an understatement of tax due to erroneous items of your spouse (or former spouse); you didn't know and had no reason to know, that there was an understatement of tax when you signed the return; and taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. Proving a lack of knowledge can be challenging, and the IRS examines factors like your education level, involvement in financial affairs, and whether you significantly benefited from the understatement.
2. Separation of Liability Relief: This provision allocates the understated tax (plus penalties and interest) between you and your spouse (or former spouse) as if you had filed separate returns. You are then responsible only for the amount allocated to you. To qualify, you must have filed a joint return and, at the time you request relief, be divorced, legally separated, widowed, or have lived apart from your spouse for at least 12 months. This relief is generally not available if you had actual knowledge of the item, giving rise to the deficiency when you signed the return.
3. Equitable Relief: If you don't qualify for traditional Innocent Spouse Relief or Separation of Liability Relief, you might still be eligible for Equitable Relief. This can apply to understatements of tax or unpaid taxes (where the amount shown on the return was correct but not paid). The IRS considers all facts and circumstances to determine if it would be unfair to hold you liable. Factors include marital status, economic hardship if relief is not granted, knowledge or reason to know, legal obligation to pay, significant benefit, and compliance with tax laws.

Applying for Innocent Spouse Relief involves filing Form 8857, Request for Innocent Spouse Relief, typically within two years from the date the IRS first attempted to collect the tax from you. This is a complex area of tax law, and professional assistance is often invaluable.

Subordination of Federal Tax Lien

A federal tax lien is a claim the government makes on your property when you neglect or fail to pay a tax debt. The lien attaches to all your assets, including real estate, personal property, and financial assets. While a discharge of lien removes it from a specific piece of property, a Subordination of Federal Tax Lien doesn't remove the lien itself but allows another creditor to move ahead of the IRS in priority to claim assets. This can be particularly useful if you need to refinance a mortgage or obtain a loan to help pay your tax liability.

The IRS may agree to subordinate its lien if it believes that doing so will ultimately increase the chances of the tax debt being paid. For example, if subordinating the lien allows you to get a home equity loan, and a portion of that loan will be used to pay down your tax debt, the IRS might approve the request. They must determine that the government's interest will still be adequately secured after the subordination or that the ultimate collection of the tax liability will be facilitated. This requires a formal application and careful consideration by the IRS.

Withdrawal of Federal Tax Lien

While a lien is generally released once the tax debt is paid, in certain circumstances, a filed Notice of Federal Tax Lien can be withdrawn. A withdrawal removes the public notice of the lien, and while you are still liable for the debt, it can improve your credit score and make it easier to obtain credit. The IRS may withdraw a filed lien if:

• The notice was filed prematurely or not in accordance with IRS procedures.
• You entered into an Installment Agreement to pay the debt, especially if it’s a Direct Debit Installment Agreement (though this is not automatic and specific conditions apply).
• Withdrawal will facilitate collection of the tax liability (e.g., by allowing you to secure a loan to pay the tax).
• It is determined that withdrawal is in the best interest of both the taxpayer and the government.

A request for withdrawal typically requires you to be current on your tax filings and payments (other than the debt covered by the lien). This can be a valuable tool for taxpayers who are actively working to resolve their debt and need to repair their credit standing.

Taxpayer Advocate Service (TAS)

The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers resolve problems with the IRS and protects taxpayer rights. If you're facing a significant hardship due to an IRS action, or if the IRS isn't resolving an issue through normal channels, TAS may be able to help. This could include situations where you are facing an immediate threat of adverse action, you have experienced a significant delay in resolving a tax problem, or you have not received a response or resolution by the date promised. TAS assistance is free and can be invaluable in navigating complex IRS procedures and ensuring your rights are respected. They can help expedite cases, stop certain collection actions, and propose solutions to difficult tax problems.

These lesser-known avenues demonstrate the flexibility within the tax system to address a wide array of taxpayer situations. Being aware of these options, in addition to the more common relief programs, provides a broader toolkit for tackling tax debt and mitigating its consequences. Always consider the specific eligibility requirements and seek professional advice when navigating these complex areas of tax administration.