IRS One-Time Forgiveness: How to Reduce Your Tax Bill
The IRS is very willing to waive penalties for first-time offenders, and in some cases, you may even be able to get some of your tax bill forgiven. Eligibility varies based on your situation, and this guide can help you determine if you’re likely to qualify. Want to get help now? Then, contact us today at the W Tax Group.
What Is IRS One-Time Forgiveness?
IRS one-time forgiveness is a phrase used by tax resolution companies to advertise penalty abatement and tax settlement programs. The IRS doesn’t have any programs called “one-time forgiveness”. Instead, it’s simply a phrase used as a marketing hook.
Tax debt relief companies frequently use this phrase in their radio and TV commercials, and they often focus on specific years like “IRS one-time forgiveness for 2022” or “IRS one-time forgiveness for 2010”. If you call a tax debt relief company and ask about one-time forgiveness, they’ll help you apply for penalty relief or a tax settlement.
In contrast, if you called the IRS and asked about one-time forgiveness, they may not even know what you’re talking about. However, several IRS programs fall under this umbrella. They include penalty abatement and tax settlements. Keep reading for more details.
IRS Forgiveness on Penalties
IRS penalty waivers fall into three different categories. Here’s an overview and tips on who qualifies:
First-Time Penalty Abatement
The IRS will generally waive penalties for first-time offenders. This is called first-time penalty abatement, and to qualify, you must have a history of being compliant with tax filing and payment requirements. You also must have not used first-time abatement any time in the last three years.
You can also get penalties waived if you had reasonable cause. This applies if situations outside of your control cause you to pay or file late. Qualifying reasons include deaths, illnesses, natural disasters, or system issues.
The IRS reviews all reasonable cause requests on a case-by-case basis. However, the IRS usually won’t remove penalties if you incurred the penalty due to poor advice from a tax pro, lack of knowledge, mistakes, or inability to pay.
Administrative or Statutory Waivers
There are also administrative or statutory penalty waivers. Statutory waivers include situations such as when you mailed a return on time but it was received late or if you incurred a penalty due to erroneous written advice from the IRS. Administrative waivers generally come into play when the IRS waives penalties because it released a tax form late or published guidance.
How to Apply for Penalty Forgiveness
If you are working with an IRS agent, you can request penalty forgiveness over the phone. Otherwise, write a letter to the IRS explaining why you want penalty forgiveness or file Form 843 (Claim for Refund and Request for Abatement). If you’re applying based on reasonable cause, submit documents that prove your situation.
How Much Can You Save With Penalty Forgiveness?
Many taxpayers save thousands or even tens of thousands of dollars, but the exact savings depend on how many penalties you’ve incurred on your account. Most IRS penalties are calculated as a percentage of your tax bill, and they can range from anywhere from 1 to 100% of your bill. By extension, the savings can be significant, and the more you owe, the more you are likely to save.
Here’s an example, imagine you file your tax return a year late and you owe $10,000. You would have incurred a failure-to-file penalty of 4.5% every month for the first five months. Additionally, you would have also incurred a failure-to-pay penalty of 0.5% for every month until this penalty reaches 25% of your balance.
In this situation, you would have incurred a $2,250 failure to file penalty plus a $600 failure to pay penalty. This brings your tax bill to $12,850 plus interest. Penalty abatement lowers your bill back down to $10,000 (plus interest).
One-Time IRS Tax Forgiveness
In some cases, the IRS may be willing to forgive some of your tax liability. This is much rarer than penalty abatement, and you must be able to prove that you cannot pay the full tax bill or that it would be inequitable to make you do so. Here are the main options:
- Offer in compromise — The IRS lets you settle your tax bill for less than you owe. You can apply based on inability to pay, doubt as to liability, or inequitable tax administration. The rules are different for each option, and for best results, you should work with a tax professional.
- Partial payment installment agreement — The IRS lets you make payments until the collection statute expires. Then, it waives the rest of the balance. If your financial situation changes, the IRS can rescind this agreement and demand payment in full.
- Currently not collectible — This is not a tax forgiveness program, but it can work to eliminate taxes in some situations. If you qualify, the IRS will stop collection on your account. If you cannot afford to pay, the debt may eventually expire — this doesn’t happen until at least 10 years after the tax has been assessed.
Generally, you can only get relief from these programs if you have a history of tax compliance. You also need to stay compliant or your may lose your eligibility. For instance, if the IRS lets you settle through an offer in compromise, the agency can rescind the agreement and demand payment in full if you miss a filing deadline anytime in the next five years.
How to Apply for Tax Debt Forgiveness
To apply for these programs, you must submit a paper application to the IRS. You also need to submit detailed information about your financial situation, including copies of wage documents, bank statements, information about loans, and potentially even appraisals of your assets. There are more details on how to apply for these programs if you follow the links above.
How Much Can You Save With Tax Forgiveness?
The IRS doesn’t publish numbers on how much people save with offers in compromise or other tax settlements. Some tax attorneys estimate that people save up to 80% of their tax bill on average, but there is limited data to back up this estimate. Note, however, that the IRS rejects the majority of offer-in-compromise applications.
If you want to increase your chances of getting approved, you should work with a tax attorney. They know what the IRS wants to see on your application, and they can also be an invaluable resource when dealing with the subjective aspects of the application.
Generally, the IRS will only accept a settlement offer if it represents the most that you can afford to pay. This is the total equity in your assets plus 12 to 24 months of your disposable monthly income. With most assets, the IRS calculates the total equity based on 80% of the asset’s value minus loans owed on the asset.
Get Help With IRS One-Time Forgiveness
Trying to get relief from IRS penalties or taxes? Then, reach out to the W Tax Group today. Eligibility for forgiveness varies based on your situation, but we may be able to help you eliminate penalties or potentially even reduce your tax bill.
To learn more, contact us at the W Tax Group today. We’ll start with a free consultation. Then, we’ll help you find the best solutions for your situation.