All too often, people think IRS liabilities mean their financial future is ruined. This couldn’t be further from the truth. If you have a large IRS debt, it may feel like there is no way out. Fortunately, at Damiens Law Firm, PLLC, we are here to tell you a different story:
A Columbus, Mississippi couple sought help with their IRS back taxes after receiving an IRS levy on their accounts. Because these taxpayers operated in the farming and forestry business, the IRS was also threatening to seize their land. At that time, their tax liability had ballooned to over $661,000 with interest and penalties.
Luckily, they sought our tax law firm’s help, and we were able to step in and communicate with their IRS revenue officer, working out a tax liability resolution that worked for our clients.
What is a filing status?
Your filing status is a way to classify your federal income tax situation based on certain criteria. Your filing status determines important factors, such as tax rates and standard deductions. Typically, individuals are able to choose from one of five different filing statuses: single, married filing jointly, head of household, married filing separately, or qualifying widow(er) with a dependent child. Each of these statuses comes with its own set of rules, and in most cases, the choice you make is permanent.
Single: This is the default filing status if you do not qualify for any of the other three statuses. This status typically applies to individuals who were never married, divorced, or widowed. If you are single, you may claim a standard deduction and one personal exemption on your tax return for yourself.
Married Filing Jointly: As the name suggests, this status applies to married couples that file a single tax return together. If you choose this filing status, your combined income will be taxed as one income, and your standard deduction and personal exemptions will be doubled.
Head of Household: Under IRS rules, a “head of household” status can only be applied to unmarried individuals who provide more than half of the support for a dependent living with them. If you choose to file your federal income tax as head of household, you can claim a standard deduction and personal exemptions for yourself and any dependents.
Married Filing Separately: This filing status applies only to married couples that wish to file separately. As with single tax filers, your income will be taxed as one income, and you will receive a standard deduction and personal exemptions for yourself.
Qualifying Widow(er) with Dependent Child: This filing status applies only to married couples that have lost a spouse during the tax year in question. Qualified widow(er)s are allowed all the benefits of joint filers, with one exception: If you file your taxes as a qualifying widow(er), you may not claim the personal exemption for your deceased spouse.
Choosing the filing status that is best for you
This is why it is important to choose the best filing status for your tax situation, taking into account all the benefits and drawbacks that each filing status offers. Having an experienced tax professional to work with can help you, not only determine which filing status would be the best for your situation, but they can help you make sure when you change your filing status that you do so properly.
At Damiens Law Firm, PLLC, we can help you choose the right filing status for your situation, and we will be happy to answer any questions you have about IRS debt and taxes.
How does your filing status affect you?
Your tax filing status affects a number of different aspects of your taxes, such as:
- The amount of income that’s taxed – As an example, if you’re married filing separately instead of jointly, you can only include up to half of your combined income when determining your tax liability.
- The amount of taxes you owe – Depending on your filing status, the amount of taxes you owe can be different. For example, if you’re married filing jointly, you and your spouse will each be responsible for any taxes owed on the return. However, if you file separately, you’ll each be responsible for your own tax liability.
- The number of deductions and credits you’re eligible for – Different filing statuses come with different deductions and credits that can help lower your overall tax bill. For example, if you’re married filing jointly, you may be able to claim the earned income credit, which is not available to those who file as single or head of household.
- The standard deduction amount – The standard deduction is the amount of income that’s not subject to taxation. The standard deduction for those who are married filing jointly is twice the amount of the standard deduction for those who are single or head of household.
- The personal exemption amount – The personal exemption is an amount that you can deduct from your taxable income for each person in your household, including yourself. The personal exemption for those who are married filing jointly is twice the amount of the personal exemption for those who are single or head of household.
What is the difference between filing jointly and filing separately?
There are a number of differences between filing jointly and filing separately, including:
- The tax rates that apply – If you file your taxes as married filing jointly, your combined income will be taxed using the same tax brackets for single filers. However, if you file your taxes as married filing separately, your combined income may be taxed at higher rates than if you had filed as single or head of household.
- The amount of taxes you’ll owe – If you file your taxes as married filing jointly, you and your spouse will each be responsible for any taxes owed on the return. However, if you file your taxes as married filing separately, you’ll each be responsible for your own tax liability.
- The standard deduction – If you file your taxes as married filing jointly, you may be able to claim the earned income credit, which is not available to those who file as single or head of household. However, if you file your taxes as married filing separately, you’ll only be able to take a standard deduction equal to half of the standard deduction for those who are married filing jointly.
- The personal exemption – If you file your taxes as married filing jointly, you may be able to claim the earned income credit, which is not available to those who file as single or head of household. However, if you file your taxes as married filing separately, you’ll only be able to take a personal exemption equal to half of the personal exemption for those who are married filing jointly.
What if you have filed with the wrong filing status?
If you have filed your taxes with the wrong filing status, you may owe additional taxes. However, you can amend your return by filing Form 1040X. You will need to include a statement explaining why you are changing your filing status and enclose any additional forms or schedules that may be required. You should file your amended return as soon as possible to avoid additional tax penalties or interest.
When we initially contacted the IRS, the federal agency was requesting the forfeiture of all the taxpayers’ farmland and an installment agreement of $3,000
per month. Given their financial information and adjusted gross income, our clients could not afford to pay $3,000 per month to the IRS.
Once we stepped in, we were able to get the taxpayers’ business books caught up and create an accurate income statement and balance sheet, thus showing the business’s actual cash flow.
Accurate books and records are an essential step in dealing with an IRS Revenue Officer, and we can help you take this important first step.
Calculating a plan with accurate books and records
With a clear picture of our client’s monthly cash flow, we were able to calculate the taxpayers’ reasonable collection potential based on their financial situation – particularly their monthly living expenses – and work towards a resolution with the Revenue Officer.
In this case, Currently Not Collectible (CNC) became the best fit for our client. By helping our client fill out a Form 433, we were able to show that paying off tax liability would result in economic hardship. Put more simply, we showed that our client could not afford to pay back taxes.
By showing financial hardship, we got our client placed in Currently Not Collectible status with the IRS.
This collection alternative is a great option for many people because you pay nothing while you are in it.
What is Currently Non-Collectible status or CNC status?
The Currently Non-Collectible Status is one of the many IRS collection alternatives available to IRS taxpayers. It is advantageous when the taxpayer has older tax liability close to reaching the CSED (Collection Statute Enforcement Date, i.e., the statute of limitations on tax liability). While it does not permanently resolve the debt, unless the statute is about to expire, it will give a taxpayer breathing room for several years – just like it did in the case we described above.
How can I qualify for a CNC?
To qualify for non-collectible status, the taxpayer must prove that their monthly income is not sufficient to cover their monthly living expenses, especially when the IRS is trying to collect.
When determining non-collectible status for IRS tax liability, the IRS will review monthly income, necessary living expenses based upon the household, assets, liability, financial hardship, and, particularly, the ability to pay the tax liability in full.
Work with an experienced tax attorney today!
If you think you may qualify for Currently Non-Collectible Status or need another form of tax relief, our firm is here for you.
The team at Damiens Law is here to help people navigate the confusing and stressful world of taxes. We help you get full advantage of tax benefits, know when it’s time to change your filing status, and much more. If you have any questions call us today at (601) 957-9672.
Attorney Joseph Damiens can help you survive the IRS.