IRS tax forgiveness: What to know

IRS tax forgiveness programs

If you are unable to pay your tax debt in full, the IRS offers several tax forgiveness programs to help.

IRS payment plan

If you cannot pay your tax bill in full, you can apply for a payment plan, also known as an installment plan, with the IRS. A short-term payment plan lasts up to 180 days for balances less than $100,000 total. A long-term plan is longer than 180 days and is paid monthly for balances under $50,000 total. You may also get penalty relief if you were unable to comply with tax requirements due to circumstances out of your control, such as a natural disaster or serious illness.

Offer in compromise

The IRS also offers the option for an offer in compromise. Formerly known as the Fresh Start Program, this gives taxpayers the opportunity to pay less than they owe, discharging some of their debt. This is an option typically available to those who cannot afford to pay (or if paying would create a financial hardship).

When you apply, the IRS assesses several factors in its decision, such as your income, expenses, assets and overall ability to pay. Not every application is approved, but you can use the IRS Offer in Compromise Pre-Qualifier Tool to check eligibility and program requirements. To be eligible for an offer in compromise, in general, you must meet certain requirements:

• You must have filed all required tax returns and paid the appropriate estimated payments, or, if you are an employer, you must have made all tax deposits for the current 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.

Spousal relief

The IRS also allows for spousal relief if your spouse made errors on your tax return without you being aware. You must contact the IRS at the number provided on your notice and inform them of the error. There are two types: injured spouse relief and innocent spouse relief.

• Injured spouse relief: You can reclaim the money taken from your tax return and apply it to your spouse’s debts.
• Innocent spouse relief: With this, you do not have to pay for additional federal income tax owed by your spouse as a result of errors on your joint tax return.

Bankruptcy

Though not technically an IRS program, filing for bankruptcy effectively stops collection efforts for unpaid taxes. Chapter 7 and Chapter 13 are the two most common types of bankruptcy:

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

How to apply for IRS tax forgiveness

The IRS has set up several resources to help you resolve your tax debt. You can contact the IRS three ways: online, by phone or in person.

• Online: You can create an online account to view your balance, set up a payment plan or access live chat. There is a QR code on your notice you can use to provide more details about your account, and the IRS offers a convenient IRS Document Upload Tool to submit required documents.
• Phone: If you prefer to speak with a representative, you can contact the IRS by phone. Check your IRS notice number or call 833-678-7020 for assistance. Many times, there is a callback option, so you do not have to wait on hold for extended periods.
• In person: The IRS offers in-person service when you visit an IRS Taxpayer Assistance Center or at a Low Income Taxpayer Clinic.

The IRS also offers the Taxpayer Advocate Service, an independent organization that works to protect your interests when it comes to tax debt. They will inform you of your rights under the Taxpayer Bill of Rights, assist with debt resolution and help with money management and budgeting tips.

Pros and cons of IRS tax forgiveness

In the best-case scenario, you can reduce the amount you owe or eliminate it altogether. You may qualify for penalty relief if you qualify for a program, such as the offer in compromise program by the IRS. If your debt isn’t eliminated, the IRS offers flexible payment plans.

On the other hand, the IRS has strict requirements regarding who can qualify for a tax forgiveness program. Some options, like an offer in compromise, require you to file an application and submit detailed information in order to be approved for tax relief or forgiveness. Even if you enroll in a tax forgiveness program, you may face additional fees, interest and penalties that can add to your debt. For example, an offer in compromise requires a $205 application fee.