The Internal Revenue Service has a good deal of power and tenacity when it comes to collecting taxes. However, in some cases, it may be possible to negotiate with the IRS to have a debt canceled. If you are struggling to pay a tax bill, there are several IRS debt forgiveness programs that may help.
5 IRS Debt Forgiveness Programs
- IRS Fresh Start Program
- Penalty Relief
- Payment Plans
- Innocent Spouse Relief
- Offer in Compromise
The Internal Revenue Service collects taxes and enforces its tax laws. Tax debts can accrue if a taxpayer fails to file tax returns or fails to pay taxes when due. If the IRS determines someone owes a tax liability, they have a variety of ways to collect that money.
IRS Tax Debt Penalties and Interest
The IRS has several methods for collecting unpaid taxes. These processes can include a federal tax lien on personal and business property, limiting the control a taxpayer has over an asset, and giving the IRS preferential status over other potential creditors. Further action includes wage garnishment and seizing or levying property, such as bank accounts, secondary homes or vehicles, and future tax refunds. Also, be aware that you won’t be able to escape a tax debt through bankruptcy.
Failing to file or pay taxes when they are due can result in penalties and will accrue interest until the debt is paid in full. You can be penalized for failing to file an income tax return or for filing one incorrectly. You can also be penalized for failing to pay income taxes when due or by an extension date if valid.
A penalty is also applied for failing to make federal tax deposits when required in a given tax year. These penalties add a percentage of the tax debt as a fee and will continue to apply each month or partial month they are not addressed. In addition to these monthly penalties, interest is compounded daily which can quickly grow a tax debt to what seems unmanageable. If the situation permits, a tax professional may be able to persuade the IRS to classify an account as “currently not collectible,” which would delay collections.
5 IRS Debt Forgiveness Programs
While the IRS may only have a few options for forgiving tax debt, there are several programs that can help offer relief to qualified taxpayers.
1. IRS Fresh Start Program
Due to the prevalence of taxpayers struggling with tax debts, the Internal Revenue Service (IRS) launched the Fresh Start Initiative (FSI) in 2011 to offer IRS tax debt relief. The goal of the IRS Fresh Start Program is to make it easier for taxpayers to request relief or seek tax debt forgiveness. The IRS accomplished this by doubling the dollar threshold that triggers a lien from $5,000 to $10,000 in unpaid taxes—although the IRS can still place a lien under that amount if the action is deemed warranted. Lien withdrawals are now easier to obtain after paying off a tax debt. You can also set up certain payment arrangements to have a lien withdrawn before the tax debt is completely paid off.
The IRS has also streamlined the different payment arrangements to make them more easily accessible to taxpayers in debt. The expanded program allows more taxpayers—including those making up to $100,000 in income—to qualify for more relief options.
2. Penalty Relief
Under special circumstances, you may be eligible for penalty relief. There are specific types of tax debt relief available under certain conditions
Reasonable cause relief may be granted if the taxpayer had a reasonable reason for missing a tax payment or filing deadline. These reasons can include natural disasters, fire, and even the serious illness or death of an immediate family member.
One Time Forgiveness
A first-time penalty abatement or “one time forgiveness” may be possible for taxpayers who have had no previous penalties in the last three tax years. They must also have filled all required returns or extensions and paid or made arrangements for their other tax debts.
There are additional types of tax debt relief classified under administrative waivers, such as when a taxpayer has acted on written or verbal advice received from the IRS, which resulted in the tax debt.
3. Payment Plans
If you owe back taxes to the IRS, you may qualify for a payment arrangement, also known as an installment agreement or IRS payment plan. Depending on your tax situation, options range from short-term, long-term, and pay-in-full payment plans. Thanks to the Fresh Start Initiative, the debt value thresholds have increased, so more taxpayers and businesses can qualify for installment agreements.
A short-term payment arrangement is available for those owing $100,000 or less, which must be paid within 120 days. If you owe $50,000 or less, a long-term payment plan is available, though some carry a $149 setup fee. Direct Debit Installment Agreements (DDIA) are another option—they cost less to set up, and waivers are available for low-income taxpayers.
Thanks to the Fresh Start Program, businesses owing less than $25,000 can apply for payment arrangements. Pass-through businesses, or those that are disregarded for tax purposes, would require the owner to submit a request with their income taxes. These businesses can be classified as single-member limited liability companies or sole proprietorships.
4. Innocent Spouse Relief
In some cases, the IRS may attempt to collect a tax debt from a spouse who did not incur the liability. This can happen for many reasons, such as when one spouse handles all the tax filing for a joint tax return. If there is an understatement of income or improper claim of a deduction or credit, these and other issues can result in the IRS assessing a tax debt. With penalties and interest, a tax debt from a previous year can quickly become a major issue.
For spouses who had no idea about improperly reported income, it is possible to seek relief. The IRS realizes it is unfair to hold an unknowing person accountable for a tax debt incurred by the spouse. By claiming innocent spouse relief, you make a formal claim that you had no knowledge of and no reason to know about the improperly reported taxes.
If you do not qualify for innocent spouse relief, you may qualify for other relief options. Married couples filing jointly are jointly and severally liable for a tax debt. This means that the IRS can go after either spouse for the entire tax debt unless a “separation of liability” request is made to separate the debt (plus penalties and interest) between the couple.
If you don’t qualify for separation of liability relief either, you may qualify for equitable relief. Talk to a professional tax attorney about relief options. Even if you owe a large tax debt, some options may work better for your situation than others. In some cases, the IRS will even settle for a lower amount than you owe.
5. Offer in Compromise
Other tax relief programs include an Offer in Compromise (OIC), which is a payment arrangement option for some taxpayers that allows them to pay back less than the amount owed. This is essentially partial debt forgiveness but only some taxpayers will qualify for these agreements. Typically, the IRS will only agree to accept a compromise if there is doubt involved—for example, a “doubt as to liability” OIC claim, in which you dispute the amount owed. You can also file a “doubt as to collectibility” OIC claim, which states that you accept the debt but are unable to pay it.
The IRS will look at your financial situation and assets, such as personal and business property, bank accounts, retirement savings, investments accounts, real estate, and income to determine if you qualify. The IRS will calculate the taxpayer’s Reasonable Collection Potential and if it is below the tax liability the IRS may consider an offer in compromise. The IRS will not try to collect if it can be proven that doing so would cause financial hardship. This depends on the taxpayer’s taxable income, bank account, living expenses, mortgage debt, student loan interest, and other considerations.
Owing income taxes and payroll taxes can lead to heavy fines and penalties for a given tax year. There are two types of OICs: a lump sum or periodic payment option. The lump-sum option allows up to five months for a taxpayer to make five payments—including an initial payment of 20%. Periodic payments can range from six months to one year. There is an application fee of $186, with possible waivers for low-income taxpayers. Many of the initial payments may not be returnable, such as those required to be submitted with the applications.
How Acadia Law Group Can Help
The tax professionals at Acadia Law Group can help you in a variety of ways. Depending on the nature of the tax debt, it’s a very good idea to have a professional look over your income tax returns. Taxpayers that fail to file may expect the IRS to file a tax return on their behalf in order to calculate the tax owed. In these cases, the IRS may not apply all of the credits or deductions a taxpayer may be eligible to receive. There is also the possibility of unused credits or business losses that can be used to offset some of the tax debt.
A tax attorney can also help with the timing of the IRS collection process. There are some actions you or the IRS can take which extends the amount of time the IRS can pursue a tax debt. In some cases, the Internal Revenue Service may even ask a taxpayer to voluntarily agree to give the IRS more time to investigate their taxes. Actions that can extend the statutes of limitations or even restart the timer on the collection process can be pointed out and often prevented by a professional tax attorney.
The experts at Acadia Law Group understand the laws and recent updates to the tax codes. A tax attorney can request tax forgiveness and contact the IRS on your behalf. They know the timelines for requesting certain programs and how to properly appeal IRS decisions. There may be a tax problem brewing in your financials that you don’t even know about yet. Let the experts at Acadia Law Group help ease your mind today.
IRS Debt Forgiveness
The IRS offers several programs that may offer relief to qualified taxpayers. The penalties and interest involved in failing to file or pay taxes can grow quickly, and the amounts due can skyrocket to what seem like unmanageable levels. Fortunately, there are solutions. The IRS Fresh Start Initiative is a tax relief program that helps many taxpayers to qualify for payment arrangements or even partial IRS forgiveness of debt.
Taxpayers may qualify for penalty relief, especially if it is their first time making a tax mistake. The IRS may offer one-time debt forgiveness for those with no mistakes in the previous three tax years. The Internal Revenue Service will also consider reasonable causes.
Depending on the amount owed, a taxpayer may qualify for an IRS payment arrangement. These can be either short-term or long-term plans involving monthly payments. There are also times when a taxpayer qualifies for unique relief options. For example, innocent spouse relief is available when a person has no idea the other spouse was making tax mistakes.
In some cases, it’s possible to obtain an offer in compromise (OIC). The IRS may forgive a partial tax liability amount in order to ensure collection. Regardless of the tax situation you are in, the professional tax experts at Acadia Law Group can help. Contact us today for a free consultation.