You’re expected to pay your taxes each year. While some taxpayers receive news that they’re entitled to a refund, others find out that they owe the IRS hundreds or even thousands of dollars. Worse, many of them don’t have the cash to pay off their tax debt. 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 payment plans, offer 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.
Does the IRS Forgive Tax Debt?
Yes, the IRS forgives tax debt in partial. It rarely forgives all of your back taxes, though, but it offers a tax debt relief program that can help debt settlement be more manageable. If you can prove financial hardship based on the agency’s standards, your debt may be forgiven in full.
How IRS Debt Forgiveness Works
The government understands that consumers may find themselves in a situation wherein they can’t pay their back taxes. Tax debt relief options exist to help taxpayers who struggle to settle their 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 amount that you owe.
In general, here are the steps you need to follow:
- Apply to the appropriate tax debt relief program
- Agree that you will keep your tax returns current from now on
- Agree to all the terms of the IRS related to the tax forgiveness
- Give IRS permission to do a periodical reassessment of your financial status
- Pay the amended or full debt
Types of One-Time IRS Debt Forgiveness
If you don’t have the ability to pay your taxes because of circumstances that are beyond your control, or you’ve been wrongly penalized, you can qualify for one-time forgiveness. There are different types of one-time forgiveness, as follow:
- First-time Penalty Abatement – The IRS may grant penalty relief for taxpayers who have back taxes 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.
IRS Tax Debt Forgiveness During COVID-19
Many taxpayers have been hit by the pandemic and continue to experience hardship because of it. The IRS understands that, so it launched the Taxpayer Relief Initiative that gives more options to taxpayers who owe taxes.
The highlights of the Taxpayer Relief Initiative include the following:
- 180 days instead of 120 days given to those who qualify for short-term repayment plan to settle their obligations
- Flexibility to OIC taxpayers who weren’t able to keep up with their payments
- Automatic addition of certain new tax balances to existing Installment Agreements
Your Options If You Can’t Pay Your Back Taxes
Listed below are your options if you find yourself financially incapable of paying your IRS back taxes.
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.
Eligibility: As its name suggests, a short-term payment arrangement lets you pay off your tax debt within 180 days or less as long as the total amount you owe, including interest and penalties, doesn’t exceed $100,000.
Meanwhile, the long-term payment plan lets you pay your IRS tax debt within 120 days or more provided that the maximum amount you owe is $50,000 at most.
How to Apply: 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 an arrangement with manageable payment terms.
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.
Eligibility: 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.
How to Apply: Download 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 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 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 to pay it yet. The agency will suspend all collection activities if your account is placed on a “currently not collectible” status.
Eligibility: 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.
How to Apply: 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 agency 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.
4. The Fresh Start Program With the IRS
If you have substantial back taxes to pay, the Fresh Start initiative can help you consolidate them and pay the tax bill more conveniently. This program provides several provisions, such as a streamlined collection process, so you can finally settle your tax debt through payment arrangements that work for you. You can choose among the three options: installment agreement, OIC, or tax lien withdrawal.
The Fresh Start initiative also increases the threshold for tax liens to $10,000, accelerates the process of removing tax liens and levies to 30 days, and increases the dollar threshold for small businesses to $25,000 to be able to pay in installment.
Eligibility: You’re eligible for a Fresh Start repayment if you owe amounts of $50,000 or less, whether you’re an individual taxpayer or a business owner. You’re qualified to have your IRS penalties waived if you’ve been unemployed for more than 30 days, or request a six-month extension for filing and paying your taxes without penalties.
How to Apply: First, you need to file all your current and back tax returns. Then you can go to IRS.gov and enroll in the Fresh Start program using the Online Payment Agreement tool. Alternatively, you can fill out and submit Form 9465.
Waiting Out the Statute of Limitations
The IRS only has 10 years to collect your unpaid taxes. You’ll benefit from the cancellation of debt or tax debt relief after 10 years, which means your tax liability that is past a decade old will be written off. It may sound appealing to wait out the IRS, but 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 relief programs.
Tips for Paying Back Taxes
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, you can do other things 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, offer in compromise, or delay the collection. 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. You need to meet certain requirements to be eligible for debt relief.
- Find out how much you owe. You can check how much taxes you owe online through the IRS portal, call 1-800-829-1040, or mail a fully accomplished IRS form.
Do Tax Relief Companies Really Work?
Not all tax relief companies really work. There are legitimate firms that can help you with your tax debt, but the most they can do is to assist you with the process. Beware of tax relief companies that promise huge reduction on your back taxes because in reality, the IRS rejects the majority of proposals it receives. It’s better to work with a qualified tax attorney or directly with the IRS.
Conclusion
If you struggle or can’t pay your back taxes, 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 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 need to face it head-on and find ways to get debt relief.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
