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Tax Debt Faq’s

What are Back Taxes?

Back taxes are taxes that are unpaid and past due taxes are assessed against a taxpayer by the government (i.e. Federal, State, Local). Federal back taxes are owed to the Internal Revenue Service (IRS). Back taxes are owed for not paying taxes when they are due, failing to report all income on a tax return, or failing to file a return.

What Is a Bank Levy?

The IRS sends the taxpayer a Final Notice of Levy. This is the final document received by the taxpayer, informing the taxpayer that the IRS is pursuing a bank levy. Another Notice of Levy is mailed to the taxpayer’s bank and the bank is legally obligated to attach all accounts in the name of the taxpayer, irrespective of sole or joint account status. Hence, levy freezes the cash funds on deposit in the accounts. The bank doesn’t allow anyone to access funds for 21 days from the date of receipt of the IRS Notice. However, once the 21 days expire, the bank must send the frozen cash funds to the IRS.

What is Bankruptcy?

Bankruptcy is a legal process which results in debt relief. The resultant debt relief can be garnered through reorganizing debt or by liquidating assets. However, filing bankruptcy doesn’t mean that you are free from your previous tax debt. In many cases, it is possible to file for bankruptcy and still owe tax debt to the IRS.

What is a Collateral Agreement?

A secondary agreement that the IRS could require before approving to settle your back tax liability.

What Is a Collection Information Statement?

The Collection Information Statement is a form used by the IRS to determine what back taxes might be owed, to derive at a proper tax resolution typically through an attorney. This form usually gives information about the taxpayer’s income, expenses, and assets.

Who Is a Creditor?

Person or company that lends you money.

What is Currently Non-Collectible Status?

Currently Non-Collectible status is a situation in which the IRS recognizes that the taxpayer does not have the financial ability to pay the tax debt through, full payment, an Installment Agreement or by an Offer in Compromise. Once a taxpayer’s account is in Currently Non-Collectible status the IRS does not seek collection against the taxpayer. Also, while in this status, the statues of limitations on the tax liabilities continue. So, if the taxpayer’s financial circumstances don’t change, the account remains in Currently Non-Collectible status until the tax liabilities expire.

What Is a Debt Consolidation Loan?

Combines all outstanding loans into one single loan, usually with a lower repayment schedule.

What Are Dissipated Assets?

Dissipated assets occur when funds are directed for a purpose other than paying off tax debt obligations. For example, a taxpayer who owes a tax debt uses monies from Home Equity Line of Credit to pay for home improvements. The IRS sees the HELOC funds for home improvement as dissipated assets.

Thus, the IRS can refuse to settle and negotiate the tax debt in view that those funds should’ve been used to alleviate the existing IRS tax debt.

What is a Lien?

A lien is a legal interest that a creditor has in the debtor’s property asset, the legal interest remains until the debt is satisfied.

What Is a Tax Lien?

A tax lien is a lien on a property asset to secure the tax debt. The tax lien is not specifically related to the debt owed on that property.

What Is Wage Garnishment?

The IRS has the right to issue a wage garnishment, a levy attached to a taxpayer’s wages who owes the IRS a tax debt. Proper notice must be given by the IRS to the taxpayer before it can actually issue the levy. The IRS informs the taxpayer’s employer of the wage garnishments and the employer is legally obligated to comply with the terms of the wage garnishment.

What is Form 1099 C?

Form 1099 C is a cancellation of debt form. As a matter of course, creditors will mail a Form 1099 C to any debtor whose debt amounting to more than $600 has been discharged. If after your bankruptcy, your debts were discharged, then the creditor will mail you a Form 1099 C. The IRS generally looks at cancelled debt as income to the debtor. So if your credit card debt of $2000 was cancelled, the IRS would usually add the $2000 to your gross taxable income.

If my debts were discharged after a bankruptcy do I still have to include discharged debt as income?

No, use Form 982 to exclude discharged debt as income. The IRS allows a bankruptcy or Title 11 exception for excluding cancelled debt as gross income for tax purposes. Form 982, available at, bankruptcy exclusion may be used to remove the cancelled debt as income. Any debt that is discharged because of a court approved bankruptcy case can be excluded from the filer’s gross taxable income. Though cancelled debt is not treated as gross income under the bankruptcy exclusion, it must be used to reduce certain tax attributes.


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