Even the IRS understands life happens, that’s why the government offers the IRS debt relief program when you can’t afford to pay your tax debt.

Under certain circumstances, taxpayers can have their tax debt partially forgiven. When the IRS considers forgiving your tax liability, they look at your present financial condition first. This means the IRS can’t collect more than you can reasonably pay.

If any collection action would force you into a financial crisis where you lose all sense of financial security, the IRS can’t collect the back taxes. Let’s go deeper into this subject and see how you can benefit from this debt relief program.

• How do I get my IRS Debt Forgiven?
• How Does Tax Debt Forgiveness Work?
• Who Is Eligible for IRS Tax Debt Forgiveness? Do I Qualify?
• What is the Fresh Start Program with the IRS?
• What are the Repayment Options under the IRS Fresh Start Program
• How to Apply for the IRS Fresh Start Program
• Does IRS Forgive Tax Debt after 10 years?
• How do I File a Hardship with the IRS?
• How much should I offer in Compromise to the IRS?
• How to pay your Offer in Compromise

How do I get my IRS Debt Forgiven?

The IRS offers several relief options for taxpayers who owe unpaid taxes. Your eligibility for each option is based on the circumstances regarding your unpaid debt. Here’s a rundown of the forgiveness and relief options:

• Installment Agreements (IA) make it possible to pay down your tax debt in chunks if you are unable to pay in full. The typical repayment period is 72 months. This option is available if you owe less than $50,000 in combined tax, penalties, and interest.
• Innocent Spouse Relief allows qualified applicants to avoid penalties stemming from tax fraud or inaccuracies they knew nothing about.
• Offer in Compromise (OIC) is a settlement option that qualifies some taxpayers to pay far less than what they actually owe to the IRS.
• Currently Not Collectible (CNC) status essentially functions as a “clean slate” program for those who can prove they are unable to pay back tax debt.

IRS tax debt forgiveness is not automatic just because you meet the requirements for a forgiveness option. You will need to fill out the appropriate IRS debt forgiveness form and comply with all applicable requirements.

Read Also: Ever Heard of the Pink Tax? If not, you Might be Paying it Unknowingly

Keep in mind the IRS will not consider you for any tax relief benefits unless all of your tax returns from current and previous years have been filed. The IRS won’t hold the fact that you’ve filed returns late against you when assessing your eligibility, so if you have unfiled tax returns, getting current is the first step to being granted debt forgiveness.

How Does Tax Debt Forgiveness Work?

You’ll use your financial situation to determine which forgiveness plan you qualify for. Here are the typical steps of an IRS debt forgiveness plan:

• Applying and being accepted to the right program
• Agreeing to stay current with all tax returns going forward
• Agreeing to all terms that the IRS puts forth regarding totals due, penalty abatement, and payment terms
• Agreeing to allow the IRS to reassess your financial status periodically
• Paying off the full or amended debt total via lump sum or payment plan

The IRS will determine how much you need to pay based on your financial situation and the circumstances surrounding your tax debt. Of course, the first step is seeing if you qualify.

Who Is Eligible for IRS Tax Debt Forgiveness? Do I Qualify?

It can be difficult to know if you qualify for debt forgiveness without sitting down with a tax expert. However, there’s a very good chance that the IRS will be willing to make a deal with you if you’ve failed to pay your full tax bill due to a financial hardship. Here are the main factors the IRS looks for:

• A tax balance below $50,000
• An income cap of $100,000 for single filers
• An income cap of $200,000 for married couples filing jointly
• A drop in net income of 25 percent for self-employed individuals

Nearly everyone who applies will be approved for an IRS repayment agreement. However, repayment may not be the best option for you. You may actually be able to pay less overall with something like an Offer in Compromise or Currently Non Collectible status.

It’s important to note that both of these options require you to disclose financial information to the IRS. The last thing you want to do is present information that contradicts your claim that you’re unable to pay your tax bill.

What is the Fresh Start Program with the IRS?

The IRS Fresh Start Program is a program that is designed to allow taxpayers to pay off substantial tax debts affordably over the course of six years. Each month, taxpayers make payments that are based on their current income and the value of their liquid assets. By the end of six years, their tax debts should be paid off in full. 

This program simplifies the process of paying back hefty tax debts. It also helps people avoid many of the detriments of owing a tax debt to the IRS including: 

• Interest
• Penalties
• Tax liens
• Seizure of assets
• Wage garnishments

People who owe a tax debt of $50,000 or less to the IRS are qualified to initiate the Fresh Start repayment process at any time. When they apply for this program, they can choose one of three repayment options that are available to them. 

The IRS initiated its Fresh Start Program in 2008 and expanded it in 2012 to ease the financial burdens of taxpayers who owe up to $50,000 in taxes. It is available to both business owners and individual taxpayers. 

Moreover, the premise of its design took into consideration the hardships faced by people who experience circumstances like unemployment. Taxpayers who are unemployed for longer than 30 days may be eligible to have their IRS penalties waived. They also could have request a six month extension to file and pay their taxes without fear of costly IRS penalties. 

What are the Repayment Options under the IRS Fresh Start Program 

The IRS Fresh Start Program offers three repayment options to taxpayers. All three options allow people to pay off their tax debts legally and satisfactorily. They also allow people to avoid further penalties and interest that could cause undue financial hardships. 

The first option available to people is called an extended installment agreement. An extended installment agreement is designed for people who owe $50,000 or less to the IRS. It grants taxpayers up to six years to pay off what they owe without incurring additional penalties and interest. It also stops IRS collection activities like wage garnishments, tax liens, and seizure of assets. 

This option is one of the most commonly utilized under the IRS Fresh Start program. The payments that taxpayers make each month will be based on how much money they currently make along with the value of the assets they have at their disposal. The payments are designed to be affordable so taxpayers can make them on time and without financial difficulties each month. 

The second option is called an Offer in Compromise or OIC. An OIC is a rare but entirely possible choice for taxpayers to pay off what they owe to the IRS. 

With an OIC, a taxpayer essential makes an offer to settle the tax debt for less than what he or she owes. Sometimes this offer is substantially lower than the actual value of the tax debt. 

If you want to make an OIC to the IRS to pay off your debt, it is important that you make a reasonable offer, one that accurately reflects your current financial situation. Because the IRS accepts OICs on an infrequent basis, you may fare better to have a tax professional prepare and submit your offer to the IRS on your behalf. A tax professional can file the appropriate IRS forms and accurately report your financial situation so the OIC will be given its due credence and potentially accepted faster. 

The last option is called a tax lien withdrawal. This repayment choice is available for taxpayers who agree to pay off their entire tax debt through a direct debit repayment option. 

Once they are set up on the direct debit repayment plan, taxpayers can formally request in writing to have the tax lien withdrawn from their accounts. People who receive the withdrawal may have avoid having it reported to the three credit reporting agencies. 

If you are unsure of what repayment option to request under the IRS Fresh Start Program, you may want to hire a tax professional to advise you. Your tax professional can also file the needed IRS forms and assist you in applying for and getting set up on the repayment option that best suits your current finances. 

How to Apply for the IRS Fresh Start Program 

To apply for the IRS Fresh Start Program, you are required to follow the guidelines established by the IRS. You first must file all of your back and current tax returns. 

You cannot request any of the repayment options if you have outstanding tax returns that you have yet to file. You also must resolve to file all of your future returns on time while you are enrolled in the Fresh Start Program. 

Once you file all of your tax returns, you can then go to IRS.gov to enroll in the program using the Online Payment Agreement tool. This tool allows you to select the repayment option in which you are interested. If you prefer not to enroll online, you can request to be part of the IRS Fresh Start Program by filling out and submitting IRS Form 9465, which can be found on IRS.gov. 

Enrolling in the program can be a complex undertaking that you might not understand or be prepared to see through to the end. To ensure you are enrolled successfully in the repayment plan of your choice, you may want to hire a tax professional to assist you. 

A tax professional can assist you in disclosing all of the requested information like how much you earn and the value of your assets. A tax professional can also help you avoid disclosing information that could be used against you in a criminal investigation or audit. He or she can advise you on the best repayment option to pursue and guide you in applying for and being accepted for it. 

Paying a substantial tax debt can put undue hardship on your finances. You can avoid going into debt and settle your debt more affordable when you take part in the IRS Fresh Start Program. A qualified tax professional can assist you in choosing the best repayment option for your finances today.

Does IRS Forgive Tax Debt after 10 years?

Generally speaking, the Internal Revenue Service has a maximum of ten years to collect on unpaid taxes. After that time has expired, the obligation is entirely wiped clean and removed from a taxpayer’s account. This is considered a “write off”. The ten-year timeframe is recognized as a Statue of Limitations on tax balances or a Collection Statue Expiration Date, commonly referred to as a CSED. 

This limitation is not easily identified by taxpayers because it is not in the best interest of the IRS to write off a debt. Your ten-year time begins when you file your tax returns and owe taxes. The IRS has three years from the date you file a tax return to assess any additional tax which would result in IRS debt. They do not make the ten-year limit understandable to taxpayers because of the fear that a taxpayer will just wait out the time.

If you are one who is selecting to delay the collection and “wait out” the timeframe then you will want to be prepared for the Internal Revenue Service Collection tactics to get severe. When the time is approaching your CSED, the Internal Revenue Service will become more aggressive in their actions. Aggressive actions can include filing tax liens or issuing a tax levy on your bank accounts or wages.

The quickest tactic to stop the collections from happening is to agree to payment plans set out by the Internal Revenue Service, otherwise known as an Installment Agreement. Before choosing to take any matter in your own hands with the Internal Revenue Service you should consult tax professionals who are trained experts in negotiating with the IRS regarding tax debt and providing tax relief.

There are many actions that can occur in which your statute of limitations can be extended. Below is a list of common actions that can temporarily stop the time from ticking.

• Being out of the country for at least 6 months
• Filing for bankruptcy
• Filing appeal requests
• Filing an Offer in Compromise application
• Signing a waiver to extend the original CSED’s for various reasons

While these actions are under examination and pending determination the Collection Statue Expiration Dates will be paused. By pausing the time, the CSED are ultimately extended longer. Sometimes it can take months after the closing of a case for the clock to commence again.

For instance, an Offer in Compromise can be reviewed for nine months. During that nine-months, the CSED dates are paused. Likewise, if you file for bankruptcy it can take up to six months after closing for the collection time to begin again.

Once the statute of limitations has expired, it is up to the taxpayer to confirm that the debt has been removed. The IRS will rarely send a notice saying they have written off the tax debt. They will make sure to deliver about five notices to make you cognizant of a balance due, though!

If you feel that your CSED’s have expired, then it would be your responsibility to contact the Internal Revenue Service and have them deliver you some type of substation to demonstrate the balance has been satisfied. Once you can authenticate the tax liability has been removed, the IRS should issue an official Certificate of Release of Federal Tax Lien or Lien Withdrawal. This information should be requested and is not automatically generated to you.

How do I File a Hardship with the IRS?

If you truly cannot afford to pay your IRS tax bill, you may qualify for hardship status. Hardship status applies to individuals, sole-proprietors, partnerships, and limited liability companies (LLCs).  Moreover, it is also called currently not collectible (CNC) or status 53. Hardship status can stop collection activity for certain tax years where a taxpayer has a liability, but the IRS does not grant this status lightly.

To apply, in most cases, you need to give the IRS detailed financial information. You have to convince the IRS you cannot afford to pay and that forcible collection would cause severe financial hardship. There are other reasons why the IRS grants CNC status.

In essence, it is forbearance by the IRS. Just like when receiving a deferment or forbearance with a student loan, interest continues to accumulate. However, with the IRS, penalties also accumulate.

Working With an IRS Representative on Hardship Status

If you have been working with an IRS representative, you can ask the IRS to mark “status 53” on your file or ask for currently not collectible status. Status 53 means the collector or IRS representative has filed Form 53 (Report of Currently Not Collectible Taxes). The IRS files this form internally.

Consequently, the IRS may require you to share more information or complete more documents such as a Form 433-A, Form 433-F, or 433-B. However, in some cases, if a collector knows your situation well, they may be willing to do this for you.

Applying for Currently Not Collectible Status

Usually, to get uncollectible status, individuals need to complete Form 433-F (Collection Information Statement for Wage Earners and Self-Employed Individuals), and businesses need to complete Form 433-B (Collection Information Statement for Businesses). In some cases, the IRS may request Form 433-A (Collection Information Statement).  It is a more extended version of Form 433-F.

In some instances, if the taxpayer owes less than $10,000, the IRS may not request the taxpayer to complete a Collection Information Statement. Generally, the taxpayer in these cases, is disabled, incarcerated, has limited or no sources of income.

These forms request incredibly detailed information about your financial situation. The IRS uses this information to determine your collection potential. In other words, the IRS decides if you can afford to pay them based on financial information you provide to them using Form(s) 433. The IRS uses Collection Financial Standards to assess how much you can pay them each month.

Information Required to Complete a Collection Information Statement

Here is some information you need to fill out these forms. Note that you may also have to provide copies of these documents to the IRS:

• Personal information (phone number, address, Social Security Numbers, age, details about the health of dependents, living arrangements, etc.).
• Employment information (name of employer, occupation, work phone number, pay stubs, how long employed, etc.).
• Other income (pensions, annuities, social security payments, child support, alimony, investment income, etc.).
• Bank and financial information (checking account statements, list of liquid assets, investment accounts, credit card statements, insurance policies, etc.).
• Information on any legal proceedings (for example, collection activities against you such as liens or garnishments).
• Three months worth of copies of monthly bills and expenses which can include:
  • Food
  • Housing (Rent, Mortgage, Taxes, etc.)
  • Apparel and Services
  • Transportation Costs
  • Utility Costs
  • Personal Care
  • Medical Expenses
• If disabled, you need to show proof such as hospital bills or government records.
• Copies of your most recent tax return(s) (IRS Form 1040, 1040A or 1040EZ). In many cases, if you have unfiled tax returns, the IRS will ask you to file them first.
• When taxpayers owe more than $100,000, the IRS may ask for motor vehicle records, credit reports, and check courthouse records to see if the taxpayer has personal property or real property ownership.

The IRS looks at your assets and if there is no equity in them or if seizing them to pay your tax liabilities creates a financial hardship, obtaining a hardship status is more likely. For example, if the IRS takes your car, then you obviously would not have the ability to get to work.

Confirming CNC Status

Once the IRS confirms CNC status, they will send you letter, usually letter 4223, Case Closed – Currently Not Collectible. Furthermore, IRS account transcripts will have similar language.

Proving financial hardship is not easy, but it is possible if you meet the requirements. Check with a professional before trying to file for uncollectible status on your own. A licensed tax professional can help you decide if declaring hardship is the best option for you.

One thing to keep in mind is that being classified as currently not collectible doesn’t solve your tax debt, but it can buy you time to get back your feet. It can also serve as a great option if you do not expect your income to rise in the future (e.g., you are retired). 

If your situation does not change by the time the CSED(s) or collection statute expiration date arrives for a given year, the taxpayer will no longer have to money owed for that year.

How much should I offer in Compromise to the IRS?

While falling behind on your taxes is never an ideal scenario, it might be your reality. Fortunately, there are ways you can climb out of debt from the IRS with tax relief programs, such as an Offer in Compromise.

In simple terms, an Offer in Compromise (OIC) can help you gain tax relief by settling your tax debt for less than the amount you owe. So, how low is the IRS willing to go? In this post, we’ll provide Offer in Compromise advice, such as how to get an Offer in Compromise approved and how much you should Offer in Compromise to the IRS.

When can this option come in handy?

The Offer in Compromise program is part of the IRS’s Fresh Start Initiative, which is a series of changes to collection procedures by the IRS to help taxpayers and businesses settle overdue tax liabilities. You can make an Offer in Compromise when you determine that you are eligible after meeting the IRS’s strict requirements.

The IRS may accept your Offer in Compromise if you meet one of the following OIC eligibility requirements:

• Doubt as to Liability: If you doubt the assessed tax liability is correct, you may be able to file an Offer in Compromise. The mistake may have resulted from an examiner error of the tax code, an examiner neglecting to utilize all the evidence presented, or if you found new documents to prove the tax debt assessed was incorrect.
• Doubt as to Collectibility: Before you can get approved for an Offer in Compromise, the IRS will decide whether they can collect a higher amount through forced collections. If your Offer in Compromise doesn’t garner a higher amount, it most likely won’t be collected.

To prove you cannot pay the full tax debt owed, the IRS will look at your reasonable collection potential (RCP), which is where they look at your net equity in assets and your projected monthly disposable income. If your RCP shows that you won’t be able to pay your debt in full by the time the collection statute expires, or if your total assets or income are less than you owe, they will most likely accept your Offer in Compromise.

• Effective Tax Administration: In this case, there is no doubt regarding the tax amount owed. However, if the IRS finds that forced collection would cause financial hardship, they are more likely to consider accepting your Offer in Compromise to ensure you can meet your basic needs.

So, in which situation should you request an Offer in Compromise? When you can prove that you meet one of these criteria. Taxes are used for a variety of social programs, such as Social Security, Medicare and Medicaid, and community development, along with other areas like national defense, law enforcement, and veterans affairs.

The IRS is not quick to approve Offers in Compromise, and in the absence of a tax mistake, your financial situation must be noticeable dire to qualify in most cases. Why? The federal government needs sufficient funds to keep the above mentioned programs up and running.

However, proving there was an error in the tax amount owed, that you can’t pay the full amount, or that paying your back taxes will cause financial hardship can result in an accepted Offer in Compromise.

How to pay your Offer in Compromise

When it’s time to sign on the dotted line and send your payment to the IRS, there are two payment options you can choose between. Additionally, you must pay an application fee of $205. The two payment options include:

• Lump Sum Cash Offer: If you choose to pay your Offer in Compromise with a lump sum payment, you must pay your balance in 5 or fewer installments within 5 months or less after the offer is accepted. With a lump sum payment, you will fill out IRS Form 656 and a nonrefundable payment equal to 20 percent of the offer amount, along with the application fee. The nonrefundable 20 percent payment will be put toward your tax liability, even if your offer is denied. You can also specify which tax liability you’d like to 20 percent payment to go toward.
• Periodic Payment Offer: If you choose the periodic payment offer, you must pay your balance in 6 or more installments within 6 to 24 months after the offer is accepted. When you send your periodic payment offer, you must include the first proposed installment payment along with Form 656, in addition to the application fee. Similar to the 20 percent payment required for the lump sum cash offer, the first proposed installment payment is nonrefundable and goes toward your tax liability.

However, while the IRS is reviewing your periodic payment offer, you must continue to make install payments provided under the terms of the offer, which are nonrefundable and go toward your tax liability, which you can specify.

With two options to choose from, you may be wondering which payment offer is best for your situation. Our Offer in Compromise advice is to choose the lump sum cash offer if you can. In most cases, the lump sum cash offer saves more money, as you can tell in scenario one from the previous section. However, if you can’t afford the 20 percent down payment and pay off your tax liability within 5 months, the 24-month option might be the best option for your situation.

Read Also: What are Taxes and Why do we File them each Year?

Additionally, if you can’t afford the $205 application fee, which became effective on April 27, 2020, you might be able to qualify for the low-income certification or submit a Doubt as to Liability offer. To qualify for the low-income certification, you must be an individual (not a corporation, partnership, or other entity) and meet one of the two criteria:

• Your adjusted gross income from the most recent taxable year falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services.
• Your household’s gross monthly income x 12 months falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services.

Filing for an Offer in Compromise is complex. It requires copious amounts of documentation and time, and in the end, the IRS can still reject your offer. Take a look at our Offer in Compromise tips to see how to get an Offer in Compromise approved:

• Get help from a tax professional. Tax professionals are skilled at what they do, and they can provide Offer in Compromise help to get you the best solution and offer. While you can certainly figure out how to file your OIC by yourself, understanding the legal jargon and calculations can be tricky. At Community Tax, our tax representatives are experienced and will always put your best interests front and center. Our team of tax professionals won’t be intimidated by the IRS’s tactics to get the most money out of you, and will protect your rights to get the best settlement.
• Be thorough. In order for your Offer in Compromise to be approved, you need to submit various forms and proof to show the IRS you can’t pay your tax liability in full. Our Offer in Compromise advice is to take your time and do your due diligence. Every number you input on your Offer in Compromise form, such as the worth of your assets and how much you earn in wages, needs to be supported with proper documentation. If the IRS finds anything inaccurate or false, they will reject your application, and you will have to start over.
• Provide a good reason. The IRS isn’t going to accept any reason if you’re unable to pay off your entire balance. You need to convince them with solid evidence that you’re unable to pay your tax liability in full. At the end of the day, remember that people just like you work for the IRS, so you can communicate with them directly to plead your case. Some reasons you may not be able to pay your overdue taxes in full include disabilities, dependent care, severe health matters, large balance amounts, and limited income potential due if you’re of an older age.
• Be patient. IRS representatives evaluating your Offer in Compromise take a considerable amount of time due to the complexity of the situation. They need to make sure the statements made on your forms are accurate, which requires fact-checking and expertise, which can take several months, so be patient.

With these Offer in Compromise tips, you’ll be one step closer to getting your offer approved.

Conclusion

Understanding your tax debt and dealing with the IRS isn’t easy to do alone, even with available programs like Fresh Start. Fortunately, there are professionals who can help you navigate your options. In fact, professional help may be necessary for you to get the best outcome for your tax problems.