Many people are struggling right now, especially those individuals who have lost their jobs due to COVID-19 while also dealing with frustrating back taxes.
When it comes to being unemployed and owing back taxes, there’s reason for optimism. While there are some instances where federal tax laws might result in new costs for the unemployed (unemployment compensation is taxable), most tax statutes are structured to help alleviate the financial burden of being unemployed with tax debt. Most importantly, there will be no interruption of your unemployment benefits as we weather the storm of the coronavirus pandemic.
If you’re currently unemployed and owe back taxes, you have several viable options to stay afloat during these challenging times. Please keep reading to learn how to delay payment or resolve back taxes if you’re currently unemployed.
How Tax Debt Affects Unemployed Individuals
Unfortunately, any compensation you receive for your unemployment status is taxable, which can further increase your tax burden. To stay on top of this issue, you should adhere to your Form 1099-G (which you will receive from the IRS in the mail) that will tell you how much you must report in unemployment on your upcoming tax returns.
To avoid owing the IRS, you must withhold taxes from your unemployment payments or make estimated tax payments on the amount you owe. Or, if you’re married, you can ask your spouse to adjust their withholdings to account for the difference.
The Earned Income Tax Credit for Unemployed Individuals
If you earn a modest salary that was significantly reduced when you were laid off, you might be eligible for the Earned Income Tax Credit (EITC) — a tax break for low-income individuals. While your unemployment benefits don’t count toward EITC eligibility, you can leverage your work income for a claim.
For married individuals, combining your income might make you EITC eligible. And if you claim dependents on your tax returns, you’ll likely receive a larger EITC benefit.
The best part? If you’re able to resolve your tax liability and no longer owe back taxes, you can receive the EITC as a refundable tax credit!
Offer in Compromise for Unemployed Individuals
The Offer in Compromise is an IRS program that helps delinquent taxpayers settle their tax debt for less. However, in order to qualify, taxpayers must meet at least one of these three conditions:
- Doubt as to Liability: The taxpayer in question can prove doubt that the tax liability is incorrect.
- Doubt as to Collectibility: The taxpayer in question can prove they likely cannot pay their tax debt in full.
- Effective Tax Administration: The taxpayer in question can prove that their ta debt would “create an economic hardship or would be unfair and inequitable.”
So what does this mean for unemployed individuals with tax debt? Unfortunately, you’ll have to deal with the IRS, but that shouldn’t prevent you from contacting a skilled and experienced tax attorney to help you file an Offer in Compromise and negotiate on your behalf.
If you meet any of the criteria above, or if you’re lacking appreciable asset equity or gainful income, you will likely be eligible to minimize your tax liability through an Offer in Compromise. And if you’re currently receiving unemployment benefits, don’t worry; the IRS cannot make their determination based on this “income,” as it is temporary.
Installment Agreements for Unemployed Individuals
Many taxpayers who are dealing with a tax liability have already entered into an installment agreement with the IRS through the “Fresh Start” program.
For all taxpayers who are currently entered in an installment agreement, your payments are suspended from April 1 to (at least) July 15, 2020. This means you are not required to make your payments if you prefer not to, and you will not default on your agreement due to non-payment. Interest will continue to accrue, but if you’re suffering a hardship, you might be better off withholding payment for now.
After July 15th, if no additional measures are taken to increase the suspension period for installment agreements, you should reach out to S.H. Block Tax Services to learn more about being placed in “Currently Not Collectible” status. This is a hardship status where the IRS eases your tax burden if you are unable to cover your monthly living expenses — such as rent, mortgage, food, childcare, healthcare, utilities, and transportation costs.
If you are unemployed and owe back taxes but have not yet filed for an installment agreement with the IRS, the first thing you need to do is to make them aware of your unemployment status. The best way to do so is by requesting a letter from the unemployment office or sending a copy of your unemployment check.
The IRS is still negotiating installment agreements during the COVID-19 pandemic and will work with you to help ease the burden of your tax liability due to your unemployed status.
Contact S.H. Block Tax Services for Help With Your Back Taxes
We’ve received a lot of phone calls, emails, and web requests related to unemployment and back taxes lately, and we’re happy to discuss the complex details of this tricky and nuanced situation with every taxpayer.
If you’re struggling with tax liabilities or any other tax-related issues right now, we’re here to help. Please contact us today by calling (410) 727-6006 or completing this brief form. Our tax attorneys and staff have decades of experience assisting taxpayers just like you and are ready to assist with even the most challenging problems.
Don’t hesitate; reach out today!
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.