IRS Tax Forgiveness: What to Know

Who is eligible for tax forgiveness?

Eligibility for tax forgiveness depends on the specific program, but the IRS generally looks at your ability to pay, financial hardship and compliance with tax requirements.

You may be eligible for tax forgiveness if you:

• Have filed all required tax returns

• Can’t afford to pay your full tax debt without financial hardship

• Have limited income, assets or both

• Can demonstrate your financial situation with documentation

• Are not currently in an open bankruptcy proceeding (for some programs)

You may not be eligible for tax forgiveness if you:

• Have unfiled tax returns

• Have the ability to pay your debt in full or through a payment plan

• Provide incomplete or inaccurate financial information

• Fail to stay current on required tax filings and payments

• Are attempting to qualify without meeting basic IRS compliance requirements

IRS tax forgiveness programs

The IRS offers several tax forgiveness programs to help you if you’re unable to pay your tax debt in full.

Payment plan (installment agreement)

If you can’t pay your tax bill in full, you can apply for an IRS payment plan, also known as an installment plan.

Short-term payment plan

If you owe less than $100,000 in combined taxes, penalties and interest, you may qualify for a short-term plan, which involves paying what you owe in 180 days or less.

Long-term payment plan

If you’ve filed all required returns and owe $50,000 or less in combined taxes, penalties and interest, you may qualify for a long-term payment plan, also known as a simple payment plan or installment agreement. The IRS states that 90% of individual taxpayers typically qualify for this plan. 

The different types of long-term payment plans include:

• Simple payment plan: Available to most taxpayers who owe $50,000 or less in combined tax, penalties and interest

• Guaranteed installment agreement: Available if you owe $10,000 or less (excluding penalties and interest), have filed and paid on time for the past five years, haven't used an installment agreement before and can pay the balance within three years

• Partial payment installment agreement: For taxpayers who can't pay their full tax debt; the IRS must review your financial documentation for approval and review your eligibility every two years to determine whether your financial situation has changed

Offer in compromise

The IRS also offers the option for an offer in compromise. This gives taxpayers the opportunity to pay less than they owe, discharging some of their debt. Typically, this option is available to people who can’t afford to pay or if paying would create a financial hardship.

When you apply, the IRS will assess your income, expenses, assets and overall ability to pay. A $205 application fee is required. Not every application is approved, but you can use the IRS offer in compromise prequalifier tool to check eligibility and program requirements.

Offer in compromise eligibility

To be eligible for an offer in compromise, you must meet certain requirements, such as:

• You must have filed all required tax returns and made the required estimated payments. Or, if you’re an employer, you must have made all tax deposits for the current quarter and previous two quarters.

• You are not in an open bankruptcy proceeding.

• You must have a valid extension for the current year’s tax return.

An OIC review can take up to 24 months, depending on case complexity and inventory levels, according to the IRS. During the review, you may be asked to provide additional financial information before a decision is made. If the IRS can process your offer, they will send you a letter with the estimated date of contact.

Penalty abatement

Penalty abatement is when the IRS removes certain penalties if the taxpayer has a valid reason for failing to file or pay on time. It doesn’t reduce the tax you owe or the interest charged on that tax, but it can lower your overall balance by eliminating eligible penalties.

The two most common types of penalty abatement are:

• First-time penalty abatement: To qualify, you’ll typically need to have filed all required returns and paid any tax due, and you can’t have had significant penalties in the previous three years.

• Reasonable cause relief: This is available when circumstances beyond your control, such as a natural disaster, serious illness or death in the family, prevented you from meeting your tax obligations.

Spousal relief

The IRS allows for spousal relief if your spouse made errors on your tax return without you being aware. You’ll generally receive a mailed notice from the IRS that you owe money on a joint tax return. You must then follow the instructions provided and contact the IRS to inform them of the error.

There are two types of spousal relief:

• Injured spouse relief: This option allows you to reclaim the money taken from your tax return and apply it to your spouse’s debts.

• Innocent spouse relief: With this option, you don’t have to pay for additional federal income tax owed by your spouse as a result of errors on your joint tax return.

Currently not collectible status

Currently not collectible status is not a formal tax forgiveness program, but it may provide temporary relief if you’re unable to pay your tax debt due to financial hardship. When your account is placed in CNC status, collections will stop temporarily, though penalties and interest will continue to accrue.

To qualify, you must provide detailed financial information to the IRS so it can evaluate your income, expenses and assets. If you qualify, the IRS will typically reassess your financial situation in the future to reevaluate your eligibility.

» RELATED: Negotiate with the IRS on back taxes

How to apply for IRS tax forgiveness

You can apply for some types of IRS tax forgiveness through your online IRS account, such as a payment plan or an offer in compromise. Generally, here are the steps you’ll take:

1. Choose a program: Decide which option fits your situation, such as a payment plan, offer in compromise or CNC status.

2. Confirm eligibility: Make sure you’ve filed all required tax returns and meet basic IRS requirements for the program you’re interested in.

3. Gather financial documents: Collect details on your income, expenses, assets and debts.

4. Complete the application: Submit the required forms for the program you choose, either online or by mail.

5. Submit and follow up: Send your application and respond to any IRS requests for additional information.

Pros and cons of IRS tax forgiveness

IRS tax forgiveness programs can make tax debt more manageable, but they aren't the right solution for everyone. Before applying, understand both the potential benefits and drawbacks.

Avoid IRS tax forgiveness scams

Scammers often pose as tax relief companies or even IRS agents to pressure consumers into paying for services they do not need or to hand over sensitive personal information. Some red flags to watch for when it comes to IRS tax forgiveness scams include:

• Approval guarantees: The IRS does not guarantee approval for tax forgiveness. Avoid anyone who promises to settle your tax debt without reviewing your full financial situation.

• Large upfront fees: Avoid companies that demand immediate payment and charge thousands of dollars in fees before doing any work.

• Claims of new programs: Scammers often advertise so-called new IRS forgiveness programs. In reality, most relief options have strict eligibility rules and are not new.

• High-pressure sales tactics: Avoid any companies that pressure you to act immediately.

• Contact by phone or text: If you owe taxes, the IRS will contact you via a notice in the mail. It will not call or text you. You can also log in to your online account to view whether you owe taxes.

You can check if a tax relief company is legitimate by using the IRS Directory of Federal Tax Return Preparers to verify its credentials.

» RELATED: Best tax relief companies

When to file for bankruptcy

Although it’s not technically an IRS program, filing for bankruptcy effectively stops collection efforts for unpaid taxes. The two most common types of bankruptcy are Chapter 7 and Chapter 13:

• Chapter 7 bankruptcy: This common form of bankruptcy uses assets like your car or home to resolve outstanding debt. Debt can be discharged in as little as three months when your income is below a certain point, as dictated by your state.

• Chapter 13 bankruptcy: Chapter 13 bankruptcy, also known as a wage earner’s plan, allows you to pay off your debt in installments over time, typically over three to five years.

Be aware that bankruptcy can affect your credit score for up to 10 years, so it is highly recommended that you consult a bankruptcy or tax attorney to provide personalized advice based on your unique financial situation.

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