Social Security checkI have written in great detail about the treatment of social security income in a bankruptcy case.  What happens outside of bankruptcy?  The answer is obvious:  It depends.

Well, that was a worthless answer, wasn’t it?  Not so fast.  What if I throw in some statutory authority?  And if you act right now, operators are standing by to give you a special deal on some case law!

It turns out that my apparently flippant answer, “It depends,” really is correct.  Let’s see why.

I.  What The Right Hand Giveth

The federal statute dealing with social security is the Social security Act (no big surprise there), which is Chapter 7 of Title 42 of the U.S. Code.   Among its many provisions is what appears to be a blanket protection of social security benefits from the depredations of all creditors except the IRS (with emphasis added):
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Adam and EveIn the Genesis account of the Fall, when the Lord asked Adam if he had sinned by eating of the tree of the knowledge of good and evil, Adam immediately pointed the finger at his wife, Eve, as the cause of his disobedience:  “And the man said, The woman whom thou gavest to be with me, she gave me of the tree, and I did eat.”  Gen. 3:12.  The Lord then confronted Eve, who immediately pointed the finger at the serpent:  “And the woman said, The serpent beguiled me, and I did eat.”  Gen. 3:13.  The serpent had no fingers, so he couldn’t point the finger at anyone. What does this have to do with tax law?  Aside from the droll assertion of many that the IRS is actually the Infernal Revenue Service that is run by Old Scratch, himself, and Will Rogers witticism on the resulting corruption of the population, “The income tax has made more liars out of the American people than golf has,” it illustrates the tendency of spouses to sometimes blame each other for their malefactions.

However, while Adam was wrong when he blamed his wife for his own crime, sometimes a spouse can legitimately aver genuine innocence regarding income tax liability.  Such a defense is unsurprisingly called the “Innocent Spouse Relief.”

What is involved in successfully claiming innocent spouse relief?

1.  Joint And Several Liability When Filing A Joint Return

When a married couple files a joint income tax return, the spouses are jointly and severally liable for any tax debt for the given tax year.  What does this mean?

They are jointly liable as a marital unit ― probably not a surprise to you ― meaning that the IRS can go after them as a couple.

And they are severally liable, meaning that each one is on the hook for the entire tax debt.  This means that while the IRS cannot collect more than the total amount owed, it can go after one spouse for the entire amount and leave the other spouse alone.  As the IRS has stated:

Thus, both spouses on a married filing jointly return are generally held responsible for all the tax due even if one spouse earned all the income or claimed improper deductions or credits.  This is also true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns.

Topic 205 – Innocent Spouse Relief (Including Separation of Liability and Equitable Relief)).

However, under the innocent spouse relief, one spouse can be relieved of joint and several liability.

There are three separate forms of relief available, though technically only one is called innocent spouse relief.  The other two are:  “Separation Of Liability Relief” and “Equitable Relief.”
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IRS forms on desk with coffeeMy last post dealt with two ways of dealing with tax debts:  1) immediately pay in full or 2) discharge the tax debt in bankruptcy.  This post deals with two more approaches: 3) enter an Offer In Compromise or 4) enter an Installment Agreement:

3.  Enter An Offer In Compromise

An offer in compromise (generally referred to in the IRS literature either as “compromise,” or as “OIC,” though I have had some agents call it an “offer”) is a way to reduce your tax debt and pay the reduced amount over a twenty-four month period.  An OIC is similar in spirit to a bankruptcy, but you resolve only your tax liability:  None of your other debts are addressed.  However, if you have other debts, the payments you make on them can help lower the amount you end up paying to the IRS (for linguistic simplicity I’ll stick with the IRS, but many other taxing authorities have similar ― but not identical ― OIC programs).

There are three grounds under which the IRS will accept an OIC:  (a) doubt as to liability; (b) doubt as to collectability; and (c) effective tax administration.  Here is the way the IRS describes these three grounds.
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Taxes w Ben Franklin imageYou’ve fallen behind on your tax obligations.  The IRS has sent you notices, which you didn’t open ― after all, who needs the aggravation.  You’ve just received a notice of levy from your bank.  It’s that time, it’s Miller time.  No, wait; that’s not the right commercial.  It’s tax debt resolution time!

What can you do to resolve your problems with the IRS?  Ben Franklin is reputed to have written, “In this world nothing can be said to be certain, except death and taxes.”  If you can’t pay that certain tax debt, you could turn to the other side of Franklin’s quote and commit suicide, but that’s not a great choice.  Or you could move to a country with no extradition treaty with the U.S.  Unfortunately, most of those countries are run by psychopathic tyrants, so again, not a great choice.

There are four main ways to resolve tax obligations:  (1) pay them in full right away; (2) discharge them in bankruptcy (if possible); (3) enter an offer in compromise; and (4) enter an installment agreement.  Which one should you use?  As you might have guessed, the answer is simple to state:  It depends.  “On what?” you ask impatiently.  To answer that second question we need some background.

First a couple of important facts:

The Return Filing Requirement

One thing is certain no matter which approach you use:  To resolve your tax problems you must first file a return for the year(s) in question.  If you haven’t filed a return, you are ineligible for any relief.

The Collection Statute

26 U.S.C. § 6502(a) has a ten-year statute of limitations on IRS collections, measured from the day the tax is assessed by the IRS.  A tax is assessed when the IRS enters the assessment into its internal system.  The ten-year limitation is specific to the IRS.  Other taxing authorities have different limitations periods.  For example, according to Cal. Rev. & Tax. Code §19255(a), the California Franchise Tax Board has a twenty-year statute of limitations on collections.  Jerry Brown wants your pound of flesh to pay for his train set).

With these truisms out of the way, let’s look at the four aforementioned approaches in seriatim.  Today’s blog covers the first two: pay in full and discharge your tax debts in bankruptcy.  The next blog will cover the third and fourth approaches: Offer in Compromise and Installment Agreements.
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