What Is the IRS Debt Forgiveness Program?
Are you considering seeking IRS debt forgiveness? While they certainly want you to pay your taxes, the Internal Revenue Service (IRS) understands that unexpected life events often affect a taxpayer's ability to pay taxes. Therefore, they offer relief to taxpayers who cannot afford their tax bills.
In 2021, 57% of U.S. households didn’t pay their federal income taxes because the IRS exempted them from paying their tax bills due to financial difficulties. This means that the department may provide some options if you cannot settle a significant amount of tax burden yourself.
In its simplest form, the IRS debt forgiveness program is a system that allows eligible taxpayers with outstanding tax debts to apply for relief. This program is available to taxpayers who meet certain criteria and have an income below the poverty line or are insolvent.
To help you understand this program, we will cover everything about IRS debt forgiveness.
Types of Debt Forgiveness Offered by the IRS
There are several types of IRS debt forgiveness programs, namely:
Installment Agreement
For people with a limited ability to fully pay off their debt, the IRS offers an installment payment plan. Instead of paying your tax liability upfront, you can enter into a written agreement to pay it in equal installments over six years or 72 monthly payments.
To qualify, you must have less than $50,000 in combined income taxes, interest, and penalties. Additionally, you can’t have failed to file past and current tax returns. In this case, you will still incur penalties and interest until your outstanding balance is fully paid.
Offer In Compromise
An offer in compromise (OIC) allows you to settle your tax liability for less than the full amount you owe. As a form of debt forgiveness, this can help reduce your overall tax burden and allow you to avoid enforcement action.
However, the IRS rarely grants OIC payments, and only a small percent of taxpayers are eligible for the program.
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Currently Not Collectible Status
In exceptional circumstances, the IRS may deem your account “currently not collectible” (CNC). In other words, they will put your tax debt on hold when they determine that paying it would cause you undue hardship.
When your account is currently not collectible, the IRS will halt all collection activity against you until you resolve your financial problem. Still, the IRS will charge you interest and penalties, and you will receive an annual tax statement as per the law.
Innocent Spouse Relief
Another IRS debt forgiveness you can take advantage of is the innocent spouse relief. With this option, you can avoid penalties that you knew nothing about, such as tax fraud or any tax inaccuracies as a result of your spouse or former spouse’s actions.
To be eligible for innocent spouse relief, you will need to establish that you were not aware of the fraudulent information when signing your joint tax return.
When To Consider the Debt Forgiveness Program
The IRS debt forgiveness program isn’t for everyone — it is a form of tax relief offered to qualified taxpayers. This means that the IRS will review your circumstances to determine whether you aren't financially able to pay your taxes in full.
It is important to note that the IRS won’t consider your request if they believe you can pay off your tax debt. However, if you are facing multiple tax problems, or your tax debt is significant and you can’t pay it in full, you may want to consider applying for debt forgiveness. These programs are designed to help people who are having trouble paying their obligations to the IRS.
How Does Tax Debt Forgiveness Work?
Your financial situation plays an integral part in determining if you are eligible for debt forgiveness. As mentioned above, the IRS won’t extend their debt relief if they see you have the resources to pay your taxes.
Otherwise, the following processes are necessary:
● You need to apply and seek acceptance to the correct debt forgiveness program.
● When granted, you must agree to keep current with your future tax returns.
● You must also agree to all the terms and conditions outlined by the IRS.
● The IRS will conduct a periodical assessment of your financial status.
● You must pay the entire tax amount due in an installment plan or single payment once you have the financial means.
Do note that the IRS will assess your tax due based on your financial situation and the circumstances of your debt. It may also be helpful to know your outstanding tax liability before applying to such programs. You can use the IRS online tool to view your account or current balance — it’s free and accessible to everyone!
Generally, most taxpayers are granted an installment agreement. However, OIC and CNC are available only for those who can demonstrate that they cannot pay their taxes.
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Alternatives to Tax Debt Relief
For the last time, the IRS is reluctant to forgive tax debt, but only certain taxpayers can qualify for the program. If you did your best and weren’t accepted, maybe it is time to consider the following alternatives:
● File for bankruptcy: Filing for bankruptcy doesn’t mean you are clear from tax debt. However, there are some circumstances when your tax debt can be waived through Chapter 7 and Chapter 13 bankruptcy filing.
● Pay with your credit card: Depending on your financial situation, paying off taxes with a credit card may be a good option to handle your tax due. Using it, you also can choose to pay in installments or a single payment with your card issuer.
● Make use of HELOC: If you own a home, you can take out a HELOC (home equity line of credit) to cover your IRS debt. However, be sure to repay your loan to avoid the risk of foreclosure.
● Borrow from your 401(k) account: As long as you are under the age of 59½, you can borrow from your 401(k) retirement account to pay your taxes without incurring penalties. If you choose this option, you must pay yourself back with interest within five years.
● Increase your earning potential: A practical way to settle your tax bills, you can consider other ways to generate income. For example, looking for a part-time job or selling unwanted clothes and other items.
Do You Need Tax Help?
If you are suffering from the consequences of tax debt or struggling to pay a growing tax burden, you are not alone. There is still hope, and the good news is that the IRS is willing to work with you to find reasonable solutions to your tax issues.
In addition, you can seek help from the tax experts at Core Group to represent your interests. When it comes to IRS debt forgiveness, there are many options available to fit your needs. However, the details of debt forgiveness programs are too complex for most taxpayers to navigate, which can lead to rejections of applications for debt relief.
That said, it is imperative to work with professionals who can help you have a fresh start. At Core Group, we have deep expertise in what it takes to help you succeed in making your tax debt a thing of the past!