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A Review of Common Indiana State Back Taxes Options

indiana-tax-helpThe Indiana Department of Revenue (DOR) is responsible for the administration of the income taxes for the State. The DOR administers all facets of Indiana’s tax code. Furthermore, this includes handling tax resolution matters for individual and business taxpayers.

If a taxpayer has an unpaid tax liability with DOR, they offer various options in order to assist taxpayers in resolving tax liabilities.  For instance, options exist to set up a monthly payment or apply for a settlement through the Offer In Compromise program. Additionally, certain taxpayers may qualify for non-collection status (called currently not collectible by the IRS) or Innocent Spouse relief in the case of a married individual.

Below we will discuss these options (not an exhaustive list) with the state of Indiana. Throughout this article, we may provide practical tips. However, taxpayers should seek the advice of a qualified tax professional.

Tax Payment Plan

The DOR will allow taxpayers to set up a monthly tax payment plan to pay their tax liability over time. However, the DOR requires that taxpayers have a balance greater than $100. Payment plan durations may range from 4 to 60 months (generally 12-36 but changed because of Covid-19). Some downsides exist when taxpayers set up a payment plan.  The DOR will assess an additional 10% penalty on the balance of the liability plus interest. They will continue until the taxpayer’s satisfied the entire balance. Therefore, some taxpayers may want to consider other options. This is true for those who are able to pay the balance in full or are able to secure outside financing to pay in full.

Offer In Compromise

The DOR has a division called the Taxpayer Advocate Office (TAO) that administers the Offer in Compromise (OIC) program. The TAO states that their office addresses complex and special tax problems.

An Offer In Compromise is a program where taxpayers may offer to settle their tax debt with the DOR for an amount less than their tax balance. Generally, these taxpayers qualify based on their current financial status. Therefore, taxpayers with the ability to pay in full or make monthly payments rarely will qualify. Specifically, the DOR states that the taxpayer must make a reasonable offer based on their total liability and their earnings potential.

You can read more about an Indiana Offer in Compromise program here.

Hardship/Not Collectible

The TAO administers a program that allows taxpayers who are suffering from financial or medical situations. More specifically, they allow taxpayers to set up special low monthly payments or to postpone making payments for a period of time. This program is called the Hardship Program.

In order for a taxpayer to be considered eligible for the hardship program one of the following must apply:

  • The outstanding tax debt threatens the taxpayer’s livelihood
  • A terminal illness or disability has fallen on the taxpayer or an immediate family member of the taxpayer
  • The taxpayer has experienced recent personal devastation resulting from a natural disaster or uncontrollable event
  • Due to recent unemployment or forced job change, the taxpayer faces financial hardship

Taxpayer’s who meet one the above-stated criteria should complete and file Form FS-H. The TAO will review the application and then determine an appropriate reasonable monthly payment plan or postponement of payments, given the specific circumstances. If accepted into the Hardship Program taxpayers should expect periodic reviews by the TAO of their financial or medical situation to determine if the Hardship Program is still necessary.

Hardship Requirements

Additional requirements of the Hardship Program include:

  • being up to date on all current filing and payment obligations
  • and to maintain compliance moving forward.

If the taxpayer files a tax return or makes a payment late, the Hardship Program payment plan or deferral may be canceled and normal collection activities will resume.

Taxpayers should be aware that this program is a temporary solution for resolving unpaid taxes. In other words, the Hardship Program will not cancel, discharge, or settle the tax debt. Nor will the Hardship Program put a hold on the account indefinitely, or stop or reverse collection actions that have occurred prior acceptance into the program.

The DOR and the TAO state that they will review Hardship applications within 15 to 20 days. They ask that taxpayers (or their representatives) mail completed applications to:

Office of the Taxpayer Advocate
Indiana Department of Revenue
P.O. Box 6155
Indianapolis, IN 46206-6155

Innocent Spouse

In certain situations, a spouse on a jointly filed tax return may be held not liable for tax debt. The IRS and the DOR recognize this principle of Innocent Spouse Relief.

The DOR will consider granting Innocent Spouse Relief in any of the following situations:

  • The IRS determined that the taxpayer is entitled to Innocent Spouse relief for the same tax year
  • Income was not reported on the tax return, and the innocent spouse was unaware or had no access or use of that income
  • Income was earned and the innocent spouse had no compensation from this income and the innocent spouse thought all taxes had been filed and paid
  • All of the income reported was the spouse’s income and the innocent spouse filed and paid the tax that was due

If a taxpayer meets one of the above criteria they should file Form IN-40SP. The DOR asks that taxpayers mail Innocent Spouse Relief requests to:

Indiana Department of Revenue
Returns Processing and Operations
P.O. Box 7207
Indianapolis, IN 46207
Or, Fax to 317-615-2697

Tax Liens or Warrants

If a tax liability becomes past due the DOR will send two preliminary collection notices to the taxpayer before it becomes collection actions. The first collection action that the DOR will initiate is to file for a tax warrant with the County Clerk of the taxpayer’s resident county. Subsequently, after registration of the tax warrant, the DOR will send the warrant to the County Sheriff to begin enforced collection efforts.

Taxpayers should not confuse a tax warrant with a warrant for arrest. The collection actions that the Sheriff might take under the authority of the tax warrant include auctioning properties, garnishing wages, and/or levying bank accounts. If the Sherriff cannot collect the tax debt after 120 days the DOR will usually then send it to an outside collection agency.

Additionally, any taxpayer who has an outstanding tax liability and has had a tax warrant filed in the county clerk’s office will also have DOR tax liens placed on all vehicle titles that are in the taxpayer’s name.

Failure to File and Pay Penalties

The failure to file a tax return and failure to pay tax penalties represent the main penalties that taxpayers should know about. The failure to file a tax return penalty equates to 20% of the tax to be shown on the return. Finally, the failure to pay tax penalty represents 10% of the unpaid tax liability or $5, whichever is greater.

Other Tax Resolutions

Challenge the Assessment

If the tax liability is the result of an assessment made by the DOR the taxpayer has 60 days from the date on the first notice issued to protest the amount due. The DOR names the first notice “A Proposed Assessment Bill (AR-80/NOPA).” If this does not resolve the matter the taxpayer may request a hearing by writing to the DOR legal division. If the protest is ultimately denied the taxpayer may appeal to the Indiana Tax Court.

Bankruptcy

Taxpayers may want to consider speaking to a bankruptcy attorney if they have significant personal debt in addition to their delinquent tax debt. Generally, taxpayers can discharge some state tax debts through bankruptcy proceedings. However, taxpayers should seek the advice of an experienced tax and bankruptcy attorney if they believe this option is right for them.

The Indiana Tax Amnesty Program

In 2015, Indiana offered a “Tax Amnesty Program.” The program was available for individuals and businesses with unreported or underreported income tax. Consequently, tax Amnesty allowed these taxpayers to file any unfiled returns and/or pay any associated liabilities or underreported liabilities free of penalty, interest, and collection fees. Taxpayers currently can not apply for this program. However, delinquent taxpayers should take advantage of the program if it opens again in the future.

Practical Tips

Taxpayers should consider escalating contentious issues to a manager within the DOR. Generally, the authority and experience of a supervisor can help resolve problems. If, after speaking with a supervisor, the taxpayer still believes that he/she is not being heard, discriminated against, having their rights violated, or Indiana law is not being followed, they should contact the Taxpayer Advocate Office (TAO).

In addition to their other duties already discussed the TAO serves to assist taxpayers with complex tax issues.  Moreover, they protect taxpayers’ rights and that the DOR’s fairly administers their processes.

Conclusion

Taxpayers should not ignore unsolved tax liabilities. In addition to the penalty, interest, and collection fees, reasonable outstanding tax balances can quickly balloon into crippling debt. Not to mention, taxpayers run the risk of having their assets seized and sold. Moreover, they can also face wage garnishments, and/or having their bank accounts levied. Therefore, taxpayers should address delinquent tax obligations as quickly as possible. Furthermore, they should seek help from a qualified licensed tax professional as soon as these problems arise. A tax professional can determine which course of action is most appropriate for their situation.

Disclaimer

Reading this article does not create an attorney-client relationship. This article should not be used as a substitute for the advice of a competent attorney or licensed tax professional admitted or authorized to practice in your jurisdiction.