How to Have Your IRS Tax Debt Forgiven
How to Have Your IRS Tax Debt Forgiven
Owing money to the IRS can be super stressful. The letters start coming in, the threatening phone calls happen, and before you know it there’s a lien on your house! What do you do? Don’t panic – there are options for getting your IRS tax debt forgiven. This article will walk you through everything you need to know.
What is IRS Tax Debt Forgiveness?
IRS tax debt forgiveness is when the IRS agrees to let you pay less than the full amount you owe in taxes, penalties, and interest. There are a few different programs the IRS offers to help taxpayers who can’t pay their full tax debt:
- Currently Not Collectible – The IRS temporarily stops trying to collect from you if you can prove you’re in financial hardship
- Installment Agreement – The IRS lets you pay your debt off over 6 years
- Offer in Compromise – You offer the IRS less than you owe, which they may accept
- Innocent Spouse Relief – Relief for taxpayers whose spouse caused the tax debt
The IRS won’t just forgive your tax debt out of nowhere. You have to qualify for one of the above programs first. The IRS will look at your income, assets, expenses, and ability to pay before deciding if you’re eligible.
Do I Qualify for Tax Debt Forgiveness?
Here are some of the main factors the IRS looks at to determine if you qualify for tax debt forgiveness:
- Your total tax debt – Generally under $50,000
- Your income – Below $100,000 for individuals, $200,000 for married couples
- Your expenses – The IRS looks at your necessary living expenses
- Your assets – The IRS will total up the value of what you own
- Your ability to pay – Based on your income and assets vs expenses
The IRS really wants to see that you don’t have enough income or assets left over, after paying necessary expenses, to pay your tax debt in full. That’s how they determine if you qualify for one of the tax debt relief programs.
How to Apply for IRS Tax Debt Forgiveness
If you think you may qualify for tax debt forgiveness, here are the steps to take:
- Gather your financial documents – Income statements, bank statements, bills, etc.
- Calculate your total assets and expenses
- Determine which tax relief program you qualify for
- Fill out the paperwork – IRS Form 656 for Offer in Compromise, etc
- Submit your application to the IRS
- Wait for a response! This can take 6+ months
It’s really important to take your time gathering documents and filling out the forms correctly. The IRS will reject incomplete or inaccurate applications. Consider hiring a tax professional to help you through the process if you’re unsure.
Offer in Compromise Explained
The Offer in Compromise (OIC) program is one of the best ways to get your IRS tax debt forgiven. Here’s a quick overview of how it works:
- You fill out IRS Form 656 offering the IRS less than you owe
- The offer should reflect what you can afford to pay based on your assets, income, and expenses
- The IRS usually accepts more favorable offers – 20% of what you owe or less
- The IRS will negotiate back and forth until an offer is accepted
- Once accepted, your tax debt is forgiven after you finish the payments!
The OIC program can get rid of your tax debt for pennies on the dollar if you qualify. It’s always worth applying even if you think your offer may get rejected at first.
What Happens After Getting Tax Debt Forgiveness?
Once the IRS accepts your offer or compromise, you’ll have to follow through and complete the agreed payments. As long as you do, the remaining tax debt will be forgiven. Here are some things to be aware of:
- Forgiven debt may be considered taxable income in the future
- Your credit score will likely drop from the forgiven debt
- The IRS can reinstate your original debt if you default on the offer
- Get professional help managing any future tax issues
Even with these potential drawbacks, getting your tax debt forgiven by the IRS is still much better than continuing to owe money you can’t pay back! Just make sure you consult tax professionals to help you navigate any complications.
Common Mistakes to Avoid
It’s easy to sabotage your own tax debt forgiveness application by making some common mistakes. Here are some tips:
- Be 100% truthful on all forms – lying gets you rejected automatically
- Don’t try hiding assets or income from the IRS
- Calculate your expenses accurately – both living expenses and allowable deductions
- Triple check your offer amount – lowball offers get rejected
- Respond promptly to any IRS requests for more information
Basically, you want to be cooperative, transparent, and proactive throughout the tax debt forgiveness process. The IRS will look for any reason to reject applications, so don’t give them one!
Other IRS Tax Relief Programs
If you don’t qualify for the Offer in Compromise program, don’t lose hope! The IRS has some other tax relief options:
- Currently Not Collectible – The IRS temporarily stops collection efforts[1]
- Installment Agreement – Pay your tax debt off slowly over 6 years[2]
- Penalty Abatement – Get failure-to-file or failure-to-pay penalties removed[3]
Look into whether you qualify for any of these tax relief programs as well. They can provide more time to pay your IRS tax debt or reduce the amounts owed.
Use a Tax Professional
Navigating IRS tax debt forgiveness is confusing AF. All the forms, waiting periods, negotiations – it’s a lot. Do yourself a favor and let a tax pro handle it for you.
A tax attorney, CPA, enrolled agent or tax relief firm has experience getting IRS tax debt reduced or eliminated. They know all the insider tricks for getting offers accepted. Their fees aren’t cheap but they almost always pay for themselves through the savings.
Plus, you avoid the stress of figuring everything out yourself. Let the tax pros handle the IRS so you can focus on more important stuff.