Who Qualifies for Tax Relief?

Eligibility criteria for tax relief

At its core, IRS tax relief eligibility comes down to your income, your expenses and your assets. The IRS does not have standard guidelines for tax relief eligibility. Instead, it reviews your situation along with the amount of tax debt you owe.

You may qualify for some form of tax relief if the following apply:

• Your monthly income is not enough to cover basic living expenses and your full tax payment.
• You have limited equity in assets such as a home, vehicle or savings.
• You experienced a significant hardship, such as a medical emergency, job loss or natural disaster.
• You are unable to pay your tax debt in full within a reasonable time frame.
• You are current on required tax filings or willing to become compliant.

Meeting one or more of these criteria does not guarantee approval, but it may indicate that you are a strong candidate for an IRS payment plan or other relief option.

The same tax debt relief options are available for both businesses and individuals, according to Stephen Weisberg, a lead tax attorney at The W Tax Group, a nationwide tax defense company. “That said, business relief is at times harder to come by depending on the status of the business and the relief requested. Both individuals and businesses are judged by their income, expenses and equity in assets,” he said.

The IRS first determines how much monthly disposable income you have and how much you have in assets. This helps determine whether and how well you can meet your basic expenses while paying off tax debt.

What is reasonable collection potential?

Reasonable collection potential, or RCP, is the IRS’s calculation of how much it believes it can realistically collect from you. This figure plays a central role in determining whether you qualify for certain types of relief, particularly an offer in compromise.

RCP generally includes two main components: your net equity in assets and your projected future income after allowable living expenses. The IRS reviews bank accounts, investments, real estate, vehicles and other property, along with your monthly income and necessary expenses.

If your reasonable collection potential is equal to or greater than your total tax debt, the IRS is unlikely to accept a settlement for less than the full amount owed. If your RCP is lower than your total balance, you may have a stronger case for compromise or other relief options.

» LEARN: How does tax relief work?

Establishing reasonable cause for tax relief

If you can’t manage your tax debt due to an extenuating circumstance — a catastrophic medical situation or a natural disaster, for example — the IRS may be willing to relieve part of your tax burden. You’ll have the burden of proof, which the IRS refers to as “reasonable cause.”

While there is no strict income cutoff for reasonable cause, the relationship between your income, debt and ability to pay matters. A taxpayer earning $30,000 per year with $50,000 in tax debt and minimal assets may present a stronger hardship case than someone earning $120,000 per year with the same balance due.

Similarly, a small business owner with $80,000 in annual net income and $150,000 in tax debt may qualify for partial payment options if business expenses and secured debts significantly reduce available cash flow.

To support a reasonable cause claim, you will typically need documentation such as medical bills, termination notices, insurance claims, bank statements and proof of monthly expenses. The more clearly you demonstrate that paying your tax debt would prevent you from meeting basic living expenses, the stronger your case may be.

» MORE: Tax relief statistics

Types of tax relief available

The type of tax relief you should seek depends on your unique financial position and your situation with the IRS. The most common types of tax relief are installment agreements, partial pay installment agreements, offers in compromise, currently not collectible status and penalty abatement.

Installment agreements

An installment agreement is the most basic and informal type of tax relief available from the IRS. This is simply done by contacting the IRS and asking for a bit more time to pay your tax debt. Another option is to set up a monthly payment plan — typically up to six years — so that the balance is paid off in a way that’s manageable for you.

Partial pay installment agreements

Similar to the above, a partial pay installment agreement occurs over a number of months, but in most cases, you never end up paying off the entire amount of the debt owed, according to Weisberg.

Offer in compromise (OIC)

An offer in compromise lets you settle your tax debts for less than the full amount owed. The IRS takes into account your income, expenses and assets when determining eligibility. This is one of the best-known forms of tax relief despite the fact that many people won't qualify. If the IRS determines you can pay the full balance, an OIC will not be accepted.

Currently not collectible

For currently not collectible status, your monthly expenses must be more than your income and you cannot have significant equity in assets, Weisberg said. This type of tax relief is reserved for situations of severe financial hardship.

“If you have a serious situation where you would not be able to pay your household bills if you had to pay the IRS, you may qualify for a currently not collectible status,” Weisberg said. “You are protected from IRS collections and not required to pay the IRS anything.”

Penalty abatement

Penalty abatement allows you to request a reduction or removal of IRS penalties, like those assessed for failing to file and/or pay your taxes by the deadline. Both first-time penalty abatement and a reasonable cause penalty abatement require you to provide proof of financial difficulty in order for your request to be accepted.

Who qualifies for the IRS Fresh Start Program?

The IRS Fresh Start initiative expanded eligibility for installment agreements and offers in compromise, making it easier for taxpayers experiencing financial hardship to qualify for relief. While the program does not eliminate tax debt outright, it broadened access to manageable payment options and settlement opportunities.

Under Fresh Start changes, the IRS increased the debt threshold for streamlined installment agreements. Taxpayers who owe below a certain amount may qualify for a payment plan without submitting extensive financial documentation. These streamlined plans typically allow repayment over several years, making them more accessible for individuals and small businesses with moderate balances.

To qualify for Fresh Start relief, you must be current on all required tax filings. This means filing all past-due returns before applying for an installment agreement or offer in compromise. The IRS will not approve most relief options if you are not in compliance with your filing obligations.

Meeting these requirements does not guarantee approval, but taxpayers who demonstrate financial hardship, fall within applicable debt thresholds and remain compliant with filing requirements may benefit from the expanded relief options introduced under the Fresh Start initiative.

» MORE: Pros and cons of IRS payment plans

How to apply for tax relief

To work directly with the IRS on a tax relief payment plan, you can apply on the IRS website or visit your local Taxpayer Assistance Center (find it here). While simple requests to extend the payment deadline can move relatively quickly, a more complicated request like an offer in compromise could take six months or more to process, Weisberg said. Instead of working directly with the IRS, you could contact a tax attorney or work with a tax relief company.

4 common misconceptions about tax relief

Below, we’ll take a look at some of the most pervasive myths you might have in your mind if you plan to approach the IRS about relieving or reducing your tax burden.

1. MYTH: Seeking tax relief will get you out of paying taxes

This is only true in very few cases. Most forms of tax relief from the IRS come in the form of extending the amount of time you have to pay your tax debt, reducing or eliminating penalties due to hardship, or negotiating settlements if you have a severe and enduring financial difficulty.

2. MYTH: The only way to get tax relief is to go directly to the IRS

There’s logic in going directly to the source — the IRS — in order to tackle tax debt. But if you don’t feel comfortable doing that, a tax attorney can help you make your case for reasonable cause or support you in determining your best course of action. There are plenty of tax relief companies to choose from that can help you negotiate tax relief with the IRS.

3. MYTH: Filing for bankruptcy will eliminate your tax debt

Most people are under the impression that bankruptcy solves all financial woes. In reality, there are strict rules about which tax debts can be discharged in Chapter 7 or Chapter 13 bankruptcy. It's important to note that recent tax debts are very rarely discharged.

4. MYTH: Your tax debt will eventually go away if you ignore it

This is never the case. Ignoring your tax debt will only ensure one thing: Your tax bill will continue to grow. When you fail to file or pay your taxes and don’t seek some sort of resolution or negotiation with the IRS, it will continue to assess penalties on your account.

These penalties and fees grow steeper the longer you let the problem persist. They can even turn into wage garnishments and the eventual seizure of your assets.

» RELATED: How to file back taxes