You’re expected to pay your taxes throughout the year. While some people receive news that they’re entitled to a refund, others find out that they owe the IRS hundreds or even thousands of dollars. To make matters worse, many of these individuals don’t have the cash to pay off their tax debt. It’s one of those situations that you don’t want to find yourself in. But if you’re facing that dilemma, you’re probably wondering, “How can I get my tax debt forgiven?”
In reality, the IRS doesn’t have an official tax debt forgiveness program. However, it offers other programs that can provide you with tax debt relief, such as IRS payment plans, offers in compromise (OIC), and “currently not collectible” status. Your debt may also be written off if it reaches the 10-year limit. You may also be eligible for a one-time tax debt forgiveness if the IRS committed an error or because of circumstances that are out of your control.
What is a Tax Debt Relief?
The government understands that consumers may find themselves in a situation wherein they can’t pay their tax debt. Tax debt relief options exist to help people who struggle to settle their tax debts.
They may come in the form of an installment program or a settlement plan wherein you can settle your debt by paying the IRS less than the total tax debt you owe. So, if you have a tax debt, you should carefully consider your options so that you can find the most suitable debt relief program for your unique circumstances before Tax Day comes.
What are Your Tax Payment Options?
Listed below are your options if you find yourself financially incapable of paying your tax debt.
1. IRS Payment Plan
If you can’t pay your tax debt in full, you can go for an installment plan instead. The IRS offers two types of payment plans – short-term and long-term payment plans.
As its name suggests, a short-term payment plan lets you pay off your tax debt within 180 days or less as long as the total amount you owe including interest and penalties don’t exceed $100,000. You can apply for a payment plan online. You can also call 800-829-1040, send a mail, or visit an IRS office and submit the form 9465 to request a payment plan.
Meanwhile, the long-term payment plan lets you pay your tax debt within 120 days or more provided that the maximum amount you owe is $50,000 at most. The application process is the same as short-term payment plans.
2. Offers in Compromise (OIC)
The second option is called offers in compromise, which allows you to settle your tax debt by paying less than the total amount you owe. You’re eligible for this option if you can’t pay your tax debt or if doing so will put you in financial hardship.
The IRS will consider factors, such as your ability to pay, income, asset equity, expenses, and if you’re current on all your tax returns, to determine if you’re eligible for an offer in compromise. Additionally, you must not be involved in an open bankruptcy proceeding to qualify. Try the IRS offer in compromise calculator to check your eligibility.
Download the IRS Form 656-B for more information about how to apply for an offer in compromise. You need to pay $205 when you apply for an OIC, but you can get a waiver if you’re a low-income taxpayer. You’re considered as such if your gross income is below 250% of the federal poverty level. Download the IRS Form 13844 to see if you’re a low-income applicant or not. All collection efforts will be stopped once you apply for an offer in compromise.
If the IRS accepts your offer, you need to meet the offer terms found in the IRS Form 656-B section 7. All of your expected refunds within the calendar year will be applied to your tax debt and you have to meet your offer terms before your federal tax liens are released. On the other hand, if the IRS rejects your OIC application, you have 30 days to appeal using the IRS debt forgiveness Form 13711.
3. Currently Not Collectible Status
You can also ask the IRS to delay the collection of your tax debt if you can’t afford it yet. The IRS will suspend all collection activities if your account is placed on a “currently not collectible” status.
The Internal Revenue Manual says that a taxpayer may be eligible for IRS “currently not collectible” status if they demonstrate financial hardship. It means the taxpayer, after paying their cost of living expenses, has little or no extra cash to pay off their tax debt.
The IRS will consider all the positive values indicated on your tax return’s income section, such as your wages, interest, real estate income, and dividends. After adding up all your positive income, the IRS will deduct standard living expenses, such as food, clothing, healthcare, housing, utilities, and transportation to determine your net disposable income. Your account may be considered as non-collectible if the IRS verifies that you’ll face financial hardship if you pay off your tax debt after covering your basic expenses.
If your account is under the IRS currently non-collectible status, that doesn’t mean all your tax debt is forgiven. You still have to pay it off once your financial situation improves. The IRS will check your annual income tax returns and re-evaluate your financial standing and capacity to pay off your tax debt.
How Long Can the IRS Collect Unpaid Taxes?
The IRS only has 10 years to collect your unpaid taxes. You’ll benefit from the cancellation of debt or tax debt forgiveness after 10 years, which means your tax liabilities that are past a decade old will be written off. It may sound appealing to wait out the IRS, but if you do, it’s not without consequences.
The government will become more aggressive with its collection efforts as your unpaid debt moves toward the end of the 10-year statute of limitation. These may include issuing a tax levy on your wages or bank accounts or filing for tax liens. If you don’t want to deal with these complications, you should consider the various tax debt relief programs.
Does the IRS Offer Penalty Relief?
The IRS also offers penalty relief to taxpayers who are unable to meet their tax obligations because of uncontrollable factors or circumstances. To be eligible, you need to meet certain criteria, such as a clean compliance history with the IRS.
What are the Types of IRS One-Time Forgiveness?
There are different types of IRS one-time forgiveness, including first-time penalty abatement, reasonable cause, and statutory exception.
- First-time Penalty Abatement – The IRS may grant penalty relief for taxpayers who have tax debts because of uncontrollable disruptions in their financial situation, such as unexpected job loss, illness, or accident. You must not have any penalty in the past 3 years to be eligible.
- Reasonable Cause – As its name suggests, you must have a good enough reason for your non-compliance. These include natural disasters, death, incapacitation, or serious illness. You must be able to show that you did your best to meet your federal tax obligations.
- Statutory Exemptions – This type of penalty relief is provided to taxpayers who received inaccurate information or advice from the IRS. To be eligible, you must show that you have solicited advice from the IRS and followed its recommendation, which resulted in a tax penalty.
How to Deal with Tax Debt?
A 2020 IRS survey noted that 95% of Americans believe that it’s their obligation to pay taxes. However, some aren’t financially capable of paying their tax debts. Fortunately, there are things you can do to reduce the negative effects of unpaid tax debt on your financial health and life, in general.
- Don’t ignore your tax debts. Find ways to get debt relief if you know that you can’t pay the IRS. Apply for an installment plan, OIC, or delay the collection. Find out how to settle with the IRS by yourself, so you can face the problem head-on. Don’t ignore it, or you’ll only end up with more problems later on.
- Be realistic. The IRS won’t grant you tax debt forgiveness just because you ask. Keep in mind that it doesn’t have an official tax debt forgiveness program but only offers debt relief options. Aside from that, you need to meet certain requirements to be eligible for debt relief.
- Find out how much you owe. Before you apply for a debt relief program, you need to know how much you owe first. There are different ways to check your tax debt. You can do it online through the IRS portal, call the IRS office at 1-800-829-1040, or mail a fully accomplished IRS form.
You have different options to choose from if you struggle or can’t pay your tax debt. You can choose from IRS payment plans, offer in compromise (OIC), or ask to put your account on a “currently not collectible” status. Even though the IRS doesn’t have an actual tax debt forgiveness program, your tax debt may still be forgiven or written off if it’s over the 10-year statute of limitation. You may also apply for including first-time penalty abatement, reasonable cause, and statutory exception. With all these options, you don’t have an excuse to ignore your tax debt problems. You just need to face it head-on and find ways to get debt relief.