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Navigating Tax Debt: Your Guide to CRA & IRS Debt Relief

filing tax returns income tax tax myths Jul 31, 2023
Distressed couple dealing with financial paperwork at home, with overlay text 'Struggling with Tax Debt? Discover Relief Options!'

As part of my ongoing effort to simplify income taxes, a topic that most consider complicated and stressful, I recently had a revealing conversation with an insider from the Canada Revenue Agency (CRA).

This individual, who has experience as a tax collector and in an auditor tax assessment role, shared some valuable insights that could provide relief to taxpayers who owe outstanding monies from previous tax years.

The Hidden Relief Options

During our discussion, I was told about two features that CRA has for taxpayer debt relief, which are not widely publicized or understood by taxpayer. These are the "Taxpayer Relief Request" and the "Write Off Freeze."

Taxpayer Relief Request

The Taxpayer Relief Request is a provision that allows taxpayers to submit a request to cancel or waive penalties and/or interest. If approved, the taxpayer would still be obligated to pay the principle tax debt amount owed, but it will not continue to accrue interest and penalties.

This relief can be granted under certain circumstances:

  1. Extraordinary Circumstances: These are situations beyond your control that prevent you from meeting your tax obligations. Examples include natural or man-made disasters such as fires or floods. To apply under this category, you would need to provide evidence of the event and explain how it affected your ability to meet your tax obligations.
  2. Actions of the CRA: This includes errors in material provided to the public, disruption in services, undue delays in resolving an objection, delay in completing an audit, or errors or delays in providing information to the taxpayer by the CRA. If you believe the CRA made an error, you should provide details of the error and how it resulted in penalties or interest.
  3. Inability to Pay or Financial Hardship: If a taxpayer is unable to pay the taxes owing due to financial hardship, it is also a ground for granting a taxpayer relief application. Usually, relief is not provided because of financial hardship unless the situation is accompanied by extraordinary circumstances. To apply under this category, you would need to provide a detailed explanation of your financial situation, including documents like bank statements, pay stubs, and bills.

To apply for this relief, you can use the "Request relief of penalties and interest" service online through My Account or Represent a Client. Alternatively, you can fill out Form RC4288, Request for Taxpayer Relief - Cancel or Waive Penalties or Interest, and submit it online or by mail.

Write Off Freeze

The Write Off Freeze is a more specific relief option for those who are unable to pay their outstanding tax debt due to unfortunate circumstances like disability, age, or chronic illness. In this case, a taxpayer can submit a written request to the CRA, outlining their inability to pay the debt now and in the future.

In the request, you need to explain your financial situation in detail, including your income, expenses, assets, and liabilities. You should also provide any supporting documents that can substantiate your claim including a clear explanation why you expect the future will not change, e.g. the likelihood of things changing financially are little. This could include medical reports, bank statements, or letters from social services.

For the "Write Off Freeze," the CRA has two potential outcomes. If your application is approved, they could write off the total amount, releasing you from any past debt. However, this rarely happens. More commonly, the CRA would "freeze" the amount owing, acknowledging that the tax debt will likely never be collected given your current financial situation.

If your financial circumstances were to improve, the expectation would be that the debt should still be paid. But with your approved application, the CRA will not actively pursue collections. This debt would remain on file until your death, at which time it would be permanently written off.

IRS Debt Forgiveness Program

In the United States, the IRS has a similar program called the Offer in Compromise (OIC). This program allows you to settle your tax debt for less than the full amount you owe. It's a legitimate option if you can't pay your full tax liability or if doing so creates a financial hardship.

To apply for an OIC, you need to submit Form 656, Offer in Compromise, and Form 433-A (OIC), Collection Information Statement. You'll also need to provide detailed information about your financial situation, including cash, investments, available credit, assets, income, and debt. It's important to be honest and thorough in this process, as the IRS will verify your information with that reported on your tax returns.

Find the forms to submit an application and step-by-step instructions in Form 656-B, Offer in Compromise Booklet. The IRS does charge a $205 application fee that is non-refundable. 

The Role of Tax Collectors

It's important to understand the role of tax collectors in this process. Tax collectors, both at the CRA and the IRS, have a job to do, and that job is to ensure that taxes owed are collected. They have the authority to take significant measures to collect outstanding tax debts, including garnishing wages, seizing assets, and even taking legal action if necessary.

However, it's crucial to remember that tax collectors are people too, and they are often just trying to do their job. They are not the enemy. In fact, they can become allies if approached correctly. Abusive language or avoidance is not in your best interest and can complicate your situation further.

Understanding these relief options and discussing them with the tax collector can often turn the situation from a collection effort to more of an advisory role. Tax collectors, if they have a better understanding of your situation, can advocate for you internally with their supervisors. This can lead to more favorable outcomes and a less stressful experience.

These relief options are not widely known, and CRA employees are often instructed not to proactively offer this information. However, they are available if you ask for them. So, if you're struggling with tax debt, these could be viable options for you.

I hope you found this helpful and informative. Stay tuned for more insider tips and tricks to help you navigate the world of taxes!

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