Sometimes seniors find themselves owing past due federal and state income taxes they cannot afford to pay.  Notices from the IRS and state tax collector can be especially frightening.  There are solutions.  If the sum owed is less than $50,000, the IRS will accept monthly payments over five years.   So for example, if $6,000 is owe to the IRS, monthly payments of around $100 can be made.  There are also laws in place that provide that persons unable to pay their taxes can be placed on “uncollectable status” with the IRS and not have to pay their past due income taxes.

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Can My Retirement Income Be Garnished for Past Due IRS Income Taxes?    

Although it is rarely done, the IRS can garnish 15% of a senior’s social security for past due income taxes.  The IRS will almost never garnish pensions and other retirement income.  Garnishment of 15% of social security will never happen without the senior being first notified.  See the steps below that can be taken to prevent the IRS from garnishing social security.

Can the IRS Garnish My Bank Account  for Past Due Income Taxes?

It is uncommon for the IRS to garnish a senior’s bank account.   If a lower income senior’s bank account is garnished by the IRS a senior can contact the IRS and often the garnishment can be immediately released by applying for what is called uncollectable status with the IRS. 

How to Obtain Uncollectable Status with IRS

Lower income seniors can often be placed on uncollectable status with the IRS and pay nothing for past due taxes.  An existing garnishment of 15% of social security by the IRS can even be stopped.  The IRS considers each person on a case by case basis. The IRS doesn’t have a set formula for declaring individuals uncollectible.  However, if you were to pay the IRS taxes and were therefore unable to pay for sufficient food, mortgage or rent, utilities, medicines or be able to provide a reasonable amount of clothing and other basic needs,  then you should qualify for uncollectable status.

Seniors with especially lower income can often obtain uncollectable status by simply phoning the IRS at (800) 829-1040.  You can ask the collector to file “53” on your case. This means to have them file IRS form 53 (only a collector or IRS official can do this).   You will not need to file detailed financial paper work.  For example a senior with income of $1,200 and rent of $600 obviously will have no extra income to pay any past due taxes.  The IRS is that generally they are very understanding and helpful towards seniors with lower incomes applying for uncollectable status.

However, you may be asked to complete and submit  IRS Form 433-A that can be found here https://www.irs.gov/pub/irs-pdf/f433a.pdf.  It is not difficult to apply for uncollectable status.  You can apply even if you are paying your IRS taxes at this time.  Carefully read the following steps to learn how to apply.

•  It is important that seniors are aware of the IRS financial standards for food, clothing, health care, housing, utilities and transportation expenses in preparing Form 433-A. Review this IRS website that has links to IRS national and local budget standards: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards.The IRS will not generally share these budget standards over the phone. They are only available on their websites.
• The  financial information you provide in Form 433-A must prove to the IRS that you do not have any surplus income after paying  necessary monthly living expenses.
• Individuals may need to submit their bank statements along with Form 433-A and any other relevant financial documentation for review.
• Therefore carefully prepare Form 433-A. Remember the criteria is that you do not have any surplus income after paying necessary monthly living expenses. Review the expenses that are allowed under the IRS guidelines published in the website above. If the expenses you provide for food, medicine, transportation and housing in Form 433-A are less than the IRS standards and your budget shows you have extra income to pay your taxes,  then you will not qualify for uncollectable status. Some seniors may have a habit of living on much less money than is reasonable and necessary and may budget less money for their needs. For example you may budget $150 for food each month, when the IRS standard that is allowed might be $300. Reasonable expenses need to exceed income.  If your financial statement show you can make a payment you may be required to make a payment at a reduced sum.
• Once taxpayers have been placed on non-collectable status, they will maintain this status for at least one year. There is a statute of limitations on IRS Taxes and many individuals remain on non collectible. When the statute of limitations ends their tax debt will be forgiven completely. Also an IRS tax lien, if any will be released.

IRS Taxpayer Advocate Service

There are websites that offer additional  general information by searching the internet for “IRS uncollectible status.”  If you have difficulty you can also contact the IRS Taxpayer Advocate Service for help.   The Taxpayer Advocate Service is an independent organization within the IRS. The Taxpayer Advocate Service (TAS) is available to individuals for free to ensure that every taxpayer is treated fairly and understands their rights. The IRS Arizona Taxpayer Advocate’s phone number is (602) 636-9500. This is their website: https://www.irs.gov/advocate

What Can be Done About Taxes Owed to a State Revenue Department?

State tax collectors cannot garnish social security, pensions, and other retirement income.  It is protected from garnishment by federal law.  State tax collectors might not tell seniors their income is protected.  Instead they may attempt collection from seniors who don’t know their rights.  If a state tax collector calls, a senior, who can’t afford to pay their past state taxes can simply advise the state tax collector his income is federally protected social security, pensions, VA benefits, or disability and they can’t afford to pay the tax.  The state can,  however intercept a federal tax refund if any.

Federal banking regulations protect twice the amount of monthly social security in a bank account into which social security is deposited. It is automatically protected from garnishment by any collector, including a state tax collector. It does not matter the sources of the funds in the account at the time of the garnishment.  So, for example, if your social security is $1000 per month, as long as there is not over $2000 in the bank account into which social security is deposited the bank disregards any garnishment.

The Arizona Taxpayers Bill of Rights published by the Arizona Department of Revenue, located at https://azdor.gov/sites/default/files/2023-03/PUBLICATION_001.pdf, unfortunately does not provide information regarding the federal protections of seniors income like social security and pensions.  If protected  money is levied from your bank account contact the Arizona Taxpayer Assistance at (602) 255-3381 or an Arizona revenue agent  to obtain a release of these federally protected funds.

What is a Tax Lien?

Sometimes seniors are unnecessarily worried when they receive a notice of a “tax lien.” A tax lien from the IRS or state taxing agency is a “lien” on a taxpayer’s property. Language in the written lien notice sometimes causes seniors to worry that they might lose their home, car and other possessions. Tax collectors are not in the business of selling peoples homes. Many seniors have little or no equity in a home for a lien to attach anyway. The taxing agency files the lien and hopes the tax gets paid if and when the home is sold.  Tax collectors are not likely to go after personal possessions, especially from seniors with lower incomes. 

I Received a 1099c What do I do?

A 1099c is a form a creditor submits to the IRS, copied to the taxpayer, that states a debt has not been paid. The IRS then takes the position in certain instances that since the debt was not paid it is now income upon which taxes need to be paid. 

The law provides that to the extent a person is “insolvent”, meaning their debts exceed their assets there is no tax liability. IRS form 982 with box 1b checked off indicating insolvency is submitted with a 1099c when the tax returns are filed. “Box” tax return preparation services on the internet will automatically (and incorrectly) count a 1099c as income which will result in taxes owing.  It is difficult to make the software do it correctly.

Many tax preparers do not understand the rules regarding 1099c and  incorrectly advise seniors that a tax needs to be paid. A senior should make sure that tax returns are filed (even if they otherwise do not file tax returns) and that they verify their tax preparer correctly filled out IRS form 982. Avoid any tax preparer that is unfamiliar with form 982.  Even if there is a tax liability lower income seniors can apply for uncollectable status with the IRS.                                                

Can Tax Relief Companies  I See Advertised Help Me?

The United State Federal Trade Commission, FTC, is an independent government agency whose primary function is consumer protection. This is a quote from the first paragraph on their website describing tax relief companies:
“Tax relief companies use the radio, television and the internet to advertise help for taxpayers in distress. If you pay them an upfront fee, which can be thousands of dollars, these companies claim they can reduce or even eliminate your tax debts and stop back-tax collection by applying for legitimate IRS hardship programs. The truth is that most taxpayers don't qualify for the programs these fraudsters hawk, their companies don't settle the tax debt, and in many cases don't even send the necessary paperwork to the IRS requesting participation in the programs that were mentioned. Adding insult to injury, some of these companies don't provide refunds, and leave people even further in debt.” https://www.consumer.ftc.gov/articles/0137-tax-relief-companies

What About an Offer in Compromise?

An offer in compromise is where the taxpayer pays the IRS a discounted amount in settlement of past due taxes where a person cannot pay past taxes in an installment agreement with the IRS.  There are better solutions for lower income seniors  who normally do not have access to funds to offer to settle back taxes.    Some CPA’s and local tax attorneys are able to answer questions and help you determine if this would be a practical solution. Here is the IRS website that describes offers in compromise: https://www.irs.gov/pub/irs-pdf/f656b.pdf

Can I Eliminate Taxes Through Bankruptcy?

Taxes often can be eliminated through bankruptcy. The general rule is that the tax must have been filed at least two years ago and be for a tax over three years old in order to be eliminated through bankruptcy.  Seniors can contact an experienced bankruptcy attorney for more information.  

Conclusion

Certainly seniors want to pay their taxes if they are able.  However, our society wants seniors to have the food and medicines they need. If there is a choice between basics and paying taxes, laws and procedures are in place protecting lower income and poor seniors from tax collection.  Their income is protected and available for their needs.  

Contributing Attorney: Eric Olsen is the Executive Director/Attorney at HELPS a nonprofit law firm that stop collectors from harassing clients.