The IRS recognizes that many people are going through difficult times financially. Often, there is a tax impact to events such as job loss, debt forgiveness or dipping into a retirement account. If your income has decreased, you may even be eligible for certain tax credits, such as the Earned Income Tax Credit, which can mean money in your pocket.
Most importantly, if you believe you may have trouble paying your tax bill, contact the IRS immediately. There are steps the IRS can take to help. To avoid additional penalties, you should always file your tax return on time even if you are unable pay your tax bill.
Tax related
What if I can't pay my taxes?Don't panic. If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills.
What if I can't pay my installment agreement?
You have several options available if your ability to pay has changed and you are unable to make payments on your installment agreement or your offer in compromise agreement with the IRS. Call the IRS immediately at 1-800-829-1040. Options could include reducing the monthly payment to reflect your current financial condition. You may be asked to provide proof of changes in your financial situation so have that information available when you call.
What if I can't resolve my tax problem with the IRS?
Contact the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.
You can contact TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to determine whether you are eligible for assistance. You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service Ā Your Voice at the IRS. You can file Form 911, Request For Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf.
What if I need legal representation to help with my tax problem but can't afford it?
Low Income Taxpayer Clinics (LITCs) represent low income taxpayers before the Internal Revenue Service, assist taxpayers in audits, appeals and collection disputes, and can help taxpayers respond to IRS notices and to correct account problems.
If you are a low income taxpayer who cannot afford professional tax assistance or if you speak English as a second language (ESL) and need help understanding your taxpayer rights and responsibilities, you may qualify for help from an LITC that provides assistance for free or for a nominal charge. Although LITCs receive partial funding from the IRS, LITCs, their employees, and their volunteers are completely independent of, and are not associated with, the federal government. The LITCs are generally operated by nonprofit organizations or academic institutions.
Each LITC independently decides if you meet the income guidelines and other criteria before it agrees to represent you. There is at least one LITC in each of the 50 states, the District of Columbia, and Puerto Rico. You can find an LITC located in or near your area by using Publication 4134, Low Income Taxpayer Clinic List. This publication identifies all LITCs who represent low income taxpayers before the IRS or provide ESL services, and is available at www.irs.gov/advocate or your local IRS office.
Low income taxpayers also may be able to receive assistance from a referral system operated by state bar associations, state or local societies of accountants, and other nonprofit tax professional organizations.
Remember, to access the genuine IRS Web site be sure to use .gov. Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.
Job related
What if I lose my job?The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues.
What if my income declines?
There are many tax credits that are subject to income limitations. If you had a reduction in income in 2008 you may be eligible for some credits or deductions. For example, the Earned Income Tax Credit is available for working families and individuals. Eligibility is determined by income and family size. You must file an income tax return in order to claim EITC.
What if I withdraw money from my IRA?
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 591/2 is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss.
What if my 401(k) drops in value
Generally, you can not claim a capital gains loss on your retirement accounts that already are receiving favorable tax treatment. The only time you would have a loss is when you receive a distribution that had previously been taxed.
Debt related
What if I lose my home through foreclosure?Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended tax return for previous tax years.
What if I sell my home for a loss?
Losses from the sale of personalĀuse property, such as your home or car, are not deductible. It is not eligible for the capital gains loss of up to $3,000 annually.
What if my debt is forgiven?
The tax impact of debt forgiveness or cancellation depends on your individual facts and circumstances. Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. There are several exceptions to the taxability of cancelled debt, such as insolvency or bankruptcy.