IRS Tax Debt Forgiveness

If you owe the IRS a tax payment and you’re unable to pay, you may qualify for tax debt forgiveness. If you feel overwhelmed by this debt or you’re otherwise unable to repay the debt, you’re not alone.

In this article, we’re taking a closer look at IRS tax debt forgiveness.

IRS tax debt forgiveness

IRS Tax Debt Forgiveness

Under specific circumstances, taxpayers may be able to drastically reduce their debt to the IRS, or temporarily halt any efforts by the IRS to collect on a tax debt. But true complete IRS tax debt forgiveness is very rare, and an unlikely option for most indebted taxpayers.

When you owe taxes to the government and have received a notice from the IRS confirming your overdue balance, you have very few options beyond paying what you owe. But you do have multiple options when it comes to how you can pay, and even how much you can pay. When pursuing IRS tax debt forgiveness, don’t think in terms of completely eradicating your debt – instead, think in terms of minimizing it.

Here’s what you need to know about IRS tax debt forgiveness.

Does the IRS Do Debt Forgiveness?

Yes and no. There are a few cases where the IRS may completely forgive a tax debt.

The first is if you can successfully argue that the IRS was in the wrong and that you do not actually owe any additional taxes. Mistakes do happen, and you reserve the right to appeal any notice or decision made by the IRS and get an independent body to review your case.

The other possibility is to argue for innocent spouse relief. In this case, husbands or wives of tax debtors who filed jointly may be cleared of their partner’s liability if they filed for them. This applies to individual income tax returns and self-employment tax returns. The requirements on successfully filing for innocent spouse relief can be somewhat strict. They include:

  • Establishing that the erroneous items on your joint return were your spouse’s fault.
  • Establishing that you didn’t know your spouse had filed erroneous information.
  • You have neither Actual Knowledge nor a Reason to Know, as defined by the IRS.
  • Neither you nor your spouse are part of a fraudulent scheme or have fraudulently transferred the property to one another.

It can be complicated to argue for innocent spouse relief, depending on the circumstances, but in cases where it is valid, it can be a valuable tool for helping innocent spouses wipe out an unjust tax debt (or more accurately, fully transfer liability onto their spouse or former spouse).

The last, and perhaps least likely option for debt forgiveness, is to let the debt run out. Tax debt is only collectible for ten years from the date of tax assessment, which is listed on your notice for an overdue balance.

Letting your debt expire is unlikely simply because the IRS knows exactly how long you’re collectible and has multiple collection actions at its disposal. Furthermore, ten years is a long time – and tax debt continues to grow whether you can afford to pay it or not.

Outside of these three options, however, the only way to fully get the IRS off your back for an overdue tax balance is to pay it, or at least pay as best you can. Thankfully, the IRS can be flexible when it comes to payment options. If you refuse to pay, however, the IRS can choose to levy increasingly aggressive collection efforts.

Explaining IRS Tax Collection Actions

When the IRS informs you of your overdue balance, they also inform you of how long you have before the deadline to pay expires, and your debt begins to accrue penalties and interest. Once your debt grows past a certain point, the IRS is within its right to issue a tax lien on all your property to convince you to pay.

If your debt is substantial to begin with, then the IRS will likely issue a lien nearly as soon as your debt is established, via a public notice. Liens are legal claims on a person’s property, and as such they represent the government’s interest in your financial assets above the interests of any other creditor, making it very difficult to get a loan or leverage any of your property for refinancing.

But liens don’t let the government physically claim anything. That’s where levies come into play. If a tax debtor continues to ignore the IRS, they may begin issuing a levy against your bank accounts, individual properties, or your wages (via a notice sent to your employer).

Through liens and levies, the IRS eventually forces your hand. Thus, it’s usually better to discuss your options with a tax professional long before the IRS decides to begin coercing payments.

IRS payment options can be divided between direct payment (pay now), short-term payment plans (pay within 120 days), and long-term payment plans (pay in monthly installments over more than 120 days).

Eligibility for each of these plans is simple: you must be up to date with your tax returns and estimated payments (if you have any to make) and can file for a payment plan either through the Internet, by phone, in person, or via the mail (different filing options incur different setup fees).

What is the Fresh Start Program?

The Fresh Start initiative, as it might be more aptly named, is a series of changes the IRS made after the financial crisis of 2007-2008 to make it a little easier for taxpayers to seek relief if they’re struggling to pay their tax debts. A similar initiative to offer greater relief during the coronavirus crisis was launched earlier last year, called the People’s First Initiative.

Changes made include lowering the requirements for a so-called offer in compromise, increasing the size a tax debt would have to be to trigger a federal tax lien, and more.

The Fresh Start program is not something you avail of or qualify for. It is part of a broader effort by the IRS to meet taxpayers halfway and help those hit by a particularly hard year (a relatable feeling in 2020) find better ways to deal with their tax debt through the IRS.

Explaining an Offer in Compromise

If you simply do not have the means to cover your tax debt, then you do have the option of telling the IRS you just can’t pay off your debt in a reasonable amount of time – but can pay a certain amount. This is an offer in compromise (OIC).

The IRS will calculate your reasonable collection potential by taking your current income and extrapolating it over the next two years (based on financial information they already have, as well as information they request from you), and if it matches what you’ve proposed, they may accept your offer. Otherwise, they will reject it, and potentially propose changes that might help you file a better offer.

There are other requirements, and you can check to see if an OIC is something you should consider via the IRS’ prequalifying tool.

When even an OIC isn’t within your means, you may be able to file for a currently not collectible (CNC) status.

This will halt any collection efforts against you (though it doesn’t lift federal tax liens), but it also freezes the statute of limitations on your debt. CNC status can help you get back on your feet, but your debt will continue to grow and wait for you once you’re ready to pay it off.

Whether you’ve been recently hit with a notice of deficiency, or are worried about a growing tax debt, it’s in your best interest to contact a tax professional as soon as possible. The earlier your tax debt is resolved, the less it will cost you.

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