Five Personal Problems You Should Mention In an IRS Audit

Tax debt problems and personal problems often go hand-in-hand. The failure of a once-thriving business, for example, can result in major tax problems for the business owner. Divorces can be another messy tax and personal situation.

IRS auditors are not necessarily famous for their compassionate understanding of human dilemmas. However, certain personal situations definitely should be mentioned while attempting to obtain tax debt relief.

1. Personal Home Foreclosure

Losing your home to foreclosure can be an awful life event that impacts your job, your family, and your income tax situation. Many people whose homes have been foreclosed may receive a 1099-A or 1099-C form from their previous lender. Often, the amount on the form is staggeringly large.

Fortunately, the IRS is not taxing "forgiven debt" related to personal home foreclosure the same way that the IRS would tax other forgiven debt, such as a credit card debt settlement. If your tax debt is related to a foreclosure, that's something that your tax debt professional and your IRS auditor needs to know.

2. Divorce

The IRS does make some accommodation for marriages gone bad. The "Innocent Spouse Rule," for instance, can help you get off the hook for a spouse's tax debt if you fit specific criteria. IRS rules for Innocent Spouse Relief are quite strict, though, so work with a tax debt professional to make sure you qualify.

3. Job Loss

In view of the brutal job market of the last two years, the IRS has taken some important measures to address tax debt caused by job loss, especially in cases of prolonged unemployment. Although an actual lessening of existing tax debt is unlikely, taxpayers suffering from unemployment can usually negotiate very flexible payment plans including low monthly payments or even temporary deferment of the tax debt.

4. Health Problems

Health problems are another personal issue that can cause tax problems. One example of how this can happen is if you take out your 401K to pay for a big medical bill. That 401K withdrawal is taxable income, and you sort of knew that, but the situation was so dire that you did what you had to do.

Make sure your tax debt resolution professional knows about stuff like that. And make sure the IRS does, too.

5. Business Failure

The statistics on small business failure are daunting. According to Michael Gerber, an influential small business consultant and author, more than 90 percent of all small businesses fail within 10 years.

Unfortunately, many business failures leave business owners with major tax issues. Unpaid payroll taxes, for instance, can result in huge tax liabilities that, for insolvent business owners, simply aren't payable at this point in time. (Note: pay the IRS before any other creditors.)

If this sounds familiar, realize that you aren't alone in your predicament. Make sure that your IRS auditor understands how your tax debt came out in human terms. Don't rely on a story to make tax debt go away, but do tell your story.

About the Author:
Andrew Freiburghouse is a freelance writer and editor living in Brooklyn, NY. He has worked in a variety of fields including magazine journalism, tax preparation, screenwriting, copywriting, and real estate. He graduated from Santa Clara University in 1999 with a B.A. in English. A regular contributor at tech blog Edgelings.com, Andrew was born and raised in the City of Los Angeles. He hopes he will survive the New York winter.