Owing money to the IRS is stressful, and getting your tax debt forgiven sounds great. But is it really possible to have the IRS wipe away your tax debts? Does tax forgiveness really exist? Yes, but only in specific situations, and most often, only part of the tax debt gets forgiven.
This guide will provide an overview of the most popular IRS tax forgiveness programs. But before we get to that, we need to clarify what tax forgiveness really is.
What Is IRS Tax Forgiveness?
There are many programs and policies the IRS has in place to help taxpayers pay their taxes. Yet, not all of these should be considered a form of tax forgiveness. For the purposes of this article, you should think of tax forgiveness as a way for you to satisfy your tax debt to the IRS for less than what you owe.
Tax forgiveness can also refer to a situation where the IRS is no longer legally allowed to collect a tax debt from you. This happens on the collection statute expiration date, which is usually about 10 years after the tax assessment. So the tax debt goes away not because the IRS has forgiven it (in a literal sense) but instead because the law prevents the IRS from trying to collect it from you. There’s more on this below.
An important thing to keep in mind when researching IRS debt forgiveness programs is to be aware of the marketing hype and puffery that many nationwide tax consultants or advocate firms use to attract customers.
For example, some companies will talk about settling your tax debt for pennies on the dollar. While this is theoretically possible, what’s more common is for taxpayers who receive tax forgiveness to still pay a notable amount of their original tax debt. It might be more realistic to think of paying 25, 50, or 75 cents on the dollar instead of just a few cents on the dollar.
Another example is when the firm uses the phrase “one-time tax forgiveness.” This sounds great, especially if you’ve never gotten into tax trouble before. However, what the firm is more likely talking about is a First Time Abate administrative waiver where the IRS agrees to waive certain tax penalties if specific conditions are met.
Yes, this technically is a type of tax forgiveness program, although it’s not as financially advantageous as you might be led to think. This is because only a relatively small portion of your tax debt gets forgiven.
Types of IRS Tax Forgiveness Programs
A term you’ll often see online or in advertisements about tax forgiveness from the IRS is “tax settlement.” Generally speaking, this refers to one or more tax forgiveness programs or options available from the IRS. For the majority of taxpayers, there are two main ways to have a tax debt reduced:
- Penalty abatement
- Offer in compromise
There are several reasons why the IRS might charge you a penalty. Two of the most common reasons include failing to file a tax return on time or not paying taxes you owe by the applicable deadline. The IRS may also charge a penalty if you provide incorrect information on a tax return. If these penalties aren’t paid in a timely fashion, the IRS may charge interest on the penalty (in addition to interest that may accrue on any unpaid tax amounts).
Many of the penalties charged by the IRS are eligible for IRS penalty relief. If granted, the IRS will remove not only the penalty but also any interest that accrued as a result of that penalty. There are three ways in which you could potentially receive penalty relief from the IRS.
Reasonable Cause Penalty Abatement
First, there’s penalty relief for reasonable cause. What counts as a “reasonable cause” will depend on the type of penalty that applies and what you did (or didn’t do) that resulted in the penalty. Possible events that may qualify as reasonable cause for a failure-to-file or failure-to-pay penalty include:
- Natural disaster
- Serious illness or death of an immediate family member
- Electronic filing system problems
For a penalty imposed because of an inaccurate tax return, the IRS might agree to waive this penalty if you took reasonable steps to file a correct return.
For example, imagine that the inaccuracy resulted from an ambiguity in the tax law. You sought help from a qualified tax professional and followed their well-reasoned advice. Despite these efforts, the IRS still thinks you interpreted the law incorrectly for your taxes. In this situation, the IRS may agree to offer you penalty relief.
Statutory Exception Penalty Waivers
The second type of penalty relief is for a statutory exception. This means there’s a tax regulation or statute that says you don’t have to pay a penalty because a particular fact or circumstance applies. Examples include conducting military operations in a combat zone and relying on incorrect information from the IRS.
Administrative Penalty Waivers
The final type of IRS penalty relief is administrative waiver. The most common type of administrative waiver is First Time Abate. To receive this relief, you must have a good history of tax compliance. This means that for the last three years:
- You haven’t received any penalties (or any penalty was removed by the IRS for a reason other than First Time Abate) and
- You filed the same type of tax return (assuming you were required to file on).
The process of applying for penalty relief will be stated in the IRS notice that informs you of the penalty. Many forms of penalty relief can be requested (and granted) over the telephone or with a special form, such as Form 843, Claim for Refund and Request for Abatement. If the IRS rejects your penalty relief request, you can request an appeal.
Offer in Compromise
When most people think of IRS tax forgiveness, they’re probably thinking of an offer in compromise or OIC. This is where the IRS agrees to settle your tax debt for less than what you owe. To be eligible to apply for an OIC as an individual, you must:
- Not be filing for bankruptcy;
- Have filed all required tax returns and made any applicable estimated tax payments; and
- Have received at least one tax bill from the IRS.
There are several reasons why the IRS may approve an OIC request.
Doubt as to Collectibility
First, the IRS may grant an OIC if it believes you don’t have the income or assets to pay your entire tax debt within a reasonable amount of time. This is known as “doubt as to collectibility.”
Doubt as to Liability
Second, there’s “doubt as to liability.” This means you have a legitimate reason to dispute the amount and/or existence of a tax debt.
Effective Tax Administration
Third, there’s an OIC based on “effective tax administration.” Here, the IRS agrees to accept less than what you owe because collecting the entire tax balance would be unfair and inequitable or would place a severe economic hardship on you.
How to Apply for an Offer in Compromise Settlement
To apply for an OIC based on effective tax administration or doubt as to collectibility, you’ll use Form 656-B, Offer in Compromise Booklet. An OIC request based on doubt as to liability will require Form 656-L, Offer in Compromise (Doubt as to Liability).
When you apply, you’ll need to include an initial payment, which could be as much as 20% of your outstanding tax debt. While the IRS considers your OIC application, the IRS might still file a tax lien, although it will suspend most other collection activities.
All OIC requests are automatically accepted if the IRS doesn’t make a decision within two years of receipt of the request. If the IRS rejects the OIC request, you can appeal it using Form 13711, Request for Appeal of Offer in Compromise.
The Statute of Limitations for IRS Collection Actions
A statute of limitations is a law that places a time limit on when a particular legal action can be brought. Statutes of limitations can exist for both civil and criminal actions. Concerning IRS tax debt collection, the statute of limitations is generally 10 years and is officially called the Collection Statute Expiration Date (CSED).
This 10-year clock starts the date when the IRS first assesses your tax and can be paused in special circumstances, like the IRS considering a request for an OIC or installment agreement. Once the CSED passes, the IRS is legally prohibited from trying to collect the tax debt subject to the CSED.
The expiration of the CSED is one of the few ways you can completely wipe away a tax debt with the IRS without having to pay anything. It’s also probably the hardest option to utilize if trying to avoid paying all of a tax debt. However, it can come in handy in two situations.
Currently Not Collectible Status (CNC)
If the IRS concludes that you can’t afford to pay for basic living expenses as well as your tax debt, they may put your tax account into CNC status. When this happens, the IRS stops trying to collect your tax debt, although interest and penalties will still accrue.
To have your account placed into CNC status, you’ll need to apply for it using Form 433-A, 433-B, or 433-F. If granted, this only suspends collection activities; it does not forgive the tax debt. However, while a tax balance has CNC status, the statute of limitations continues to run. Therefore, it’s possible to take advantage of the CSED through the use of CNC status.
Partial Payment Installment Agreement (PPIA)
Most taxpayers who can’t pay their taxes and aren’t eligible for debt forgiveness will usually make use of a payment plan or installment agreement. Most of these don’t offer tax forgiveness, but the PPIA can sometimes result in a partially forgiven tax balance.
The PPIA requires you to make monthly payments to the IRS. You’ll make these payments until the CSED and any remaining balance gets forgiven by the IRS. However, the agreement is not set in stone. With a PPIA, the IRS checks on your finances periodically (either with a two-year review or by checking the tax returns you file), and if your finances improve, you may have to switch to a regular payment plan.
Other IRS Tax Programs That Can Help
While not technically tax forgiveness, there are plans and programs in place to make it easier for you to pay your taxes. Two popular methods are payment plans and installment agreements. Depending on how much you owe, the IRS will grant you an extra few months to a few years to pay off your tax debt.
There’s also something called innocent spouse relief. Innocent spouse relief exists because, generally speaking, you are legally responsible for any taxes your spouse owes if you file a joint tax return with your spouse. This is true even if your spouse earned all of that income or you later divorce, and the divorce decree states your spouse is responsible for those taxes.
As you can imagine, this can sometimes lead to unfair situations. Even though both spouses are jointly liable for taxes stemming from a jointly filed return, usually only one spouse prepares the return and/or has detailed knowledge as to the information on the return.
In some cases, a spouse will provide wrong information on the return, which leads to an unexpected tax bill. This mistake is sometimes accidental, but it’s often intentional. The IRS understands that it can sometimes be unfair to hold both married taxpayers responsible when only one spouse made the error.
If the IRS grants innocent spouse relief, it’ll usually come in the form of equitable relief or separation of liability relief. The former applies when the unpaid taxes, penalties, and/or interest technically apply to you, but the facts and circumstances indicate that it would be unfair for the IRS to collect those amounts from you.
In the latter situation, you’re still liable for unpaid taxes and any applicable penalties and interest, but only for your share of the tax balance.
In most cases, you can’t claim innocent spouse relief if you knew or should have known about the errors on your tax return. One exception to this rule is if you were the victim of domestic abuse and you either signed the tax return or chose not to correct your abusive spouse out of fear.
Looking for an IRS Settlements or Tax Forgiveness?
Depending on your financial situation, you may qualify for some form of IRS tax forgiveness. Because these programs make it possible to get rid of outstanding tax balances for less than what you owe, the IRS doesn’t easily grant these forgiveness requests.
This is why it’s important to get help to apply for an IRS forgiveness program. Working with a tax attorney, such as one from Seattle Legal Services, PLLC, will not only increase your chances of getting approved, but it will also help you obtain better terms, such as lower monthly payments or a bigger tax settlement. Getting help can also make the process go faster, which can save money in reduced interest and penalties. To find out how our experienced tax attorneys can help you, contact us today.