Does the IRS Forgive Tax Debts?
When your taxes are due to the IRS, they expect a lump sum payment for the full amount owed. If you can’t pay your entire tax balance at this time, the IRS may let you pay off your tax debt over several months or years. But during this time, the IRS will charge interest and penalties.
In certain situations, you can pay off your tax debt for less than what you owe. In other words, you can take advantage of what amounts to IRS tax forgiveness. Keep in mind, however, that despite what you have read or seen in advertisements on the radio, television, or online, there is no official “IRS debt forgiveness program.”
Instead, the IRS employs several different programs and policies that may allow you to reduce the amount of money you have to pay them. Let’s take a look at how these work, eligibility requirements, and alternatives to tax forgiveness with the IRS.
How to Get Tax Debt Forgiveness
You’ll hear a lot of marketing talk from tax debt relief companies about settling your tax debt for pennies on the dollar or getting it wiped out entirely. Either option is possible, but both are fairly rare because they only apply in a unique set of circumstances.
That being said, taking care of an unpaid tax bill for less than what you owe is a realistic possibility. Just note that the part of your tax balance that gets forgiven might only apply to penalties or a portion of the taxes owed. Below are some of the most common methods you can sometimes use to reduce the amount of money you have to pay the IRS.
The IRS will impose penalties for a variety of tax-related infractions. These are most common if you don’t file or pay your taxes (or don’t do either on time). If you have an unpaid tax bill with the IRS, there’s a decent chance that part of the balance you owe includes penalties and interest accrued on those penalties.
The good news is that there are scenarios where the IRS will remove many of these penalties. These penalty waivers typically exist in three main situations.
First, there’s an administrative waiver. The most common type of administrative waiver is First Time Abate. You’re eligible for First Time Abate if you’re facing a penalty for failure to file a tax return, failure to pay taxes owed, or failure to deposit the tax the proper way.
The primary qualification condition for First Time Abate is that within the past three years, you have filed all applicable tax returns and didn’t incur any IRS tax penalties (or any penalties were removed by the IRS for a reason other than First Time Abate).
The second is reasonable cause penalty relief. The IRS grants this form of penalty relief if you acted in good faith and with reasonable cause. In plain English, this means you acted reasonably to avoid or fix the tax problem leading to the penalty.
For example, if there was a hurricane that destroyed your home and that’s why you filed your income tax return several months late, the IRS may agree to remove or reduce any late filing penalties.
Finally, the IRS will waive its penalty if there’s a statutory exception. This refers to a tax law provision that requires the IRS to forgo a tax penalty in certain situations. Some of these include circumstances where the tax penalty was due to you:
- Relying on wrong advice from the IRS.
- Living in a federal disaster area.
- Filing the tax return on time, but the IRS didn’t receive or process the return correctly.
- Being involved in a military operation in a combat zone.
Expiration of Statute of Limitations
When it comes to collecting a tax debt, the IRS is up against the clock. Generally speaking, the IRS has 10 years to collect unpaid taxes. This deadline is officially called the Collection Statute Expiration Date (CSED).
The 10-year CSED clock begins ticking when the IRS first assesses your tax, which may come weeks or months after filing a return. After the CSED passes, the IRS can no longer collect that particular tax balance from you. But before you get too excited, there are several things to keep in mind before you rely on the statute of limitations expiration to reduce or eliminate a tax debt.
First, there are multiple scenarios where the CSED can be extended or paused. These include:
- Requesting an installment agreement or offer in compromise.
- Filing for bankruptcy.
- Requesting a collection due process hearing.
- Filing an innocent spouse claim.
- Entering a combat zone.
- Completing certain types of military service.
- Living outside the United States continuously for six months or more.
If one or more of these apply to you, they can add months or years to the time the IRS has to collect your tax debt.
Two, each tax year has its own CSED. So if you failed to pay $10,000 for the 2015 tax year and $20,000 for the 2016 tax year, your $30,000 unpaid tax balance doesn’t get wiped out in 2025. Rather, only $10,000 would be removed in 2025, with the remaining $20,000 getting removed in 2026.
Third, it’s very difficult to go 10 years without the IRS doing anything to try and collect unpaid taxes. If they know you owe them money, the IRS may place a tax lien on your property or levy your assets. Additionally, once a lien is in place when the CSED expires, the IRS can still collect on the tax debt.
Even though these challenges exist to using the collection statute of limitations to get rid of IRS tax debt, the CSED can still be a realistic possibility in specific circumstances. Two situations include currently not collectible status and partial payment installment agreements.
Currently Not Collectible Status
If you can’t afford to pay for basic living expenses and your tax debts, the IRS may place your unpaid tax balance into currently not collectible (CNC) status. When this happens, the IRS will stop trying to collect the tax debt from you. A key point to remember about CNC status is that it does not forgive the tax debt, but only stops the IRS from trying to collect money from you. Also, interest and penalties may continue to accrue while your tax account has CNC status.
So how does CNC status result in IRS tax forgiveness? While the IRS holds off on collecting your tax debt, the 10-year statute of limitations clock continues to run. In some cases, the CSED deadline will expire while an unpaid tax debt is currently not collectible.
But once your tax balance gets placed in CNC status, you’re not automatically going to receive tax forgiveness once the statute of limitations has run. This is because the IRS may still file a lien against your property and they will periodically review your finances to see if they can resume collection activities against you.
Partial Payment Installment Agreement
If you can’t pay your entire tax balance when due, the IRS has payment plans and installment agreements that let you make monthly payments to the IRS over several months or years. Exactly how these plans work depends on how much you owe and how quickly you can pay off your tax debt.
Most of the time, these don’t result in tax forgiveness because you can pay off your entire tax balance before the applicable statute of limitations deadline. But there’s something called a partial payment installment agreement (PPIA) where you make monthly payments to the IRS until the statute of limitation expires. The IRS then forgives any tax balance that remains.
To take advantage of a PPIA, you’ll not only have to meet the initial financial eligibility requirements, but you’ll also need to send the IRS financial updates during the course of the PPIA. These updates may result in the IRS raising your monthly PPIA payments making it more likely you pay off your entire tax debt before the CSED.
Offer in Compromise
An offer in compromise, or OIC, is an agreement between you and the IRS where the IRS agrees to settle your tax debt even though you don’t pay it off in full. When most people think of an IRS debt forgiveness program, they’re probably thinking of an OIC.
Getting approved for an OIC isn’t easy, as the IRS will only agree to it if they’re pretty sure they aren’t going to collect your entire tax balance by the statute of limitations deadline. You’ll also need to meet certain conditions, such as not filing bankruptcy and being current with all required tax returns and estimated tax payments (if applicable).
Innocent Spouse Relief
When filing a joint tax return as a married couple, each spouse is legally liable for any taxes, penalties, or interest owed, even if they stem from the other spouse’s wrongdoing. The IRS recognizes that this can sometimes result in a spouse owing money they might legally owe, yet would be unfair to collect.
For example, a victim of spousal abuse might be forced to file a fraudulent joint return or engage in tax fraud with an abusive spouse because they fear refusing could result in bodily harm to them or close family members. Or the taxpayer may have honestly had no idea their spouse was intentionally underreporting income to the IRS because that spouse made all of the money and handled all financial matters.
Innocent spouse relief can result in tax forgiveness in two ways. With equitable relief, the IRS agrees to forgive your unpaid taxes, interest, and/or penalties. With separation of liability relief, the IRS only collects your portion of any applicable unpaid taxes, penalties, and/or interest, with the remainder being paid by your spouse.
What Are the IRS Debt Forgiveness Eligibility Requirements?
The eligibility requirements are different for each debt forgiveness option. However, two overarching conditions exist among most of these tax resolution possibilities.
First, you must be in good standing with the IRS. Put another way, you need to be current with your tax return filings and/or have a relatively clean history of tax compliance. First Time Abate penalty relief is a perfect example of this.
Second, you must be struggling financially. This should come as no surprise, as the IRS doesn’t want to give tax debt discounts to taxpayers who can afford to pay more. Yet the IRS also understands that they can’t expect money from a taxpayer who doesn’t have any.
The IRS also doesn’t want to take money from you if that means you can’t afford basic life necessities such as food, shelter, and transportation to and from work. Two instances where these considerations come into play are the offer in compromise and currently not collectible status.
Alternatives to Tax Debt Forgiveness
Tax forgiveness isn’t available to everyone, but there are still things you can do if you don’t qualify. As briefly mentioned earlier, there are short-term and long-term payment plans (installment agreements) that let you make monthly payments toward your tax bill. You’ll still pay your entire tax debt, but you’ll have an extra few months or years to do so.
Another possibility is to review your prior tax returns to see if there are any mistakes or omissions in your favor. For instance, there might be a deduction or credit you missed. Or perhaps you reported income that doesn’t exist. Making these changes with an amended return could lower your tax balance and make it easier to pay off.
As an option of last resort, you can file for Chapter 11 or Chapter 13 bankruptcy. If you can’t make payments on unpaid taxes, chances are pretty good you can’t pay your other bills. Unfortunately, bankruptcy can’t discharge all tax debts.
Whether your tax debt can be discharged in bankruptcy depends on the unique facts of your case. In most cases, taxes can’t be discharged if they stem from returns you never filed or filed fraudulently. Taxes must also be older than three years to be eligible for discharge. And during the bankruptcy process, you’ll need to continue filing all necessary tax returns and paying any taxes due.
What About the IRS Fresh Start Program?
Sometimes called the IRS Fresh Start Initiative, the IRS Fresh Start Program refers to a set of legal and policy changes the IRS implemented more than a decade ago. These changes were designed to make it easier for taxpayers to resolve their tax debts.
When you see this term floating around, it’s most likely being used by national tax debt relief companies to promote their services. This isn’t an official IRS or government program and is instead a buzzword these companies use as a blanket term to cover the various tax forgiveness programs discussed earlier in this article.
Could I Apply for the Zero Tax Elimination Program?
You could, but it might make you the victim of a scam. If you hear a company using this term within the context of IRS tax debt relief, you should probably avoid contacting them.
In the best-case scenario, this company will try to help you pay off your tax debt with something like an offer in compromise or currently not collectible status. But they probably charge excessive fees and/or probably don’t do the best job of convincing the IRS to let you settle your tax debts for less than what you owe. In the worst-case scenario, this company will take your money and personal information and then do nothing to help you with your tax issues.
What Happens if I Do Nothing About My Tax Debt?
It might be tempting to take the “head in the sand” approach to your tax debt. This is especially true given the possibility of having a tax debt eliminated with the statute of limitations. But this is a financially dangerous strategy because the IRS has a variety of tax debt collection tools they can use to recover the money for your unpaid taxes, penalties, and/or interest. By ignoring your tax problem, you could soon be dealing with:
- Bank levies
- Wage garnishment
- Tax liens
- Penalties and interest
- Difficulty getting a mortgage or credit – unpaid taxes don’t directly affect your credit score, but tax liens are public record and may hinder your ability to get a personal loan or mortgage)
Learn More About Your Tax Debt Settlement Options
There are multiple avenues for dealing with your tax debt. To find the right solution for you, you might need additional help. To get help now contact us at the W Tax Group. Our tax attorneys can provide a free consultation to evaluate your tax situation to see which option is best for you.