Overview of IRS Tax Forgiveness Programs
Owing money to the Internal Revenue Service is a terrifying situation.
Nevertheless, over 13 million Americans owe the IRS thousands or even tens of thousands of dollars every year.
The IRS can collect the taxes owed at any time, putting the taxpayer at serious risk of losing their earnings, savings, and other assets. The IRS, because of a backlog created during the pandemic, will be sending more CP14, CP503s, and other notices soon than in the past.
While there isn’t a specific IRS tax forgiveness program, this article covers all that anyone owing serious IRS taxes should consider.
Who Should Consider an IRS Tax Forgiveness Program?
Anyone who owes more money to the IRS than they can reasonably afford to pay should look at a payment plan or some kind of IRS tax forgiveness program.
By law, the IRS cannot attempt to collect back taxes if it would throw a person into financial hardship. However, the taxpayer must first demonstrate to the IRS why they cannot afford to pay up.
Generally, the IRS won’t erase all of a taxpayer’s liabilities if they cannot afford to pay in full. However, although rare, the IRS does provide options that allow taxpayers to pay less than they owe reduce their tax liabilities.
Why Should You Apply for an IRS Tax Forgiveness Program?
Usually, it’s in a taxpayer’s best interest to seek a tax resolution option that reduces their liabilites if they owe several thousand in back taxes and cannot make the monthly minimum payments on an installment agreement, also known as a payment plan.
Ignoring taxes owed won’t cause the IRS to realize a taxpayer doesn’t have money suddenly. Instead, the IRS will use the following channels to collect the money the taxpayer owes:
The IRS starts enforcement actions by filing a lien against a taxpayer’s assets, such as homes, cars, or boats.
Under a tax lien, the government lays legal claim to the asset and prevents its sale or transfer. The IRS won’t immediately seize the asset under a lien, but the taxpayer cannot sell the asset in most cases.
A levy is when the IRS legally seizes a taxpayer’s assets.
Beyond physical belongings, the IRS can levy bank accounts, retirement savings (including IRAs and 401ks), inheritance, and other financial sources.
If someone dies with outstanding back taxes, the IRS might levy their assets or even seek payment from their next of kin.
The IRS may garnish a taxpayer’s wages in order to recover taxes owed. They generally cannot levy your whole paycheck but it can leave taxpayers with very little left.
During garnishment, the IRS takes a portion of someone’s paycheck every pay period until the taxes owed becomes satisfied. Technically a type of levy, the IRS will contact a taxpayer’s employer or hire a third party to get the job done. However, there are ways to release a wage garnishment.
Depending on the amount owed, the IRS can make a taxpayer’s life extremely difficult.
The IRS might tell the State Department to revoke a taxpayer’s passport if they owe $59,000 or more in back taxes, penalties, and interest.
Find Out What You Owe
Before negotiating with the IRS, a taxpayer should figure out exactly what they owe – including interest and penalties. The number might be frightening, but it’s an essential first step.
Anyone can figure out what they owe by using the IRS online tool, calling the IRS, mailing the IRS, or hiring a professional.
How to Settle with the IRS: 8 Forgiveness Options
The IRS offers several solutions for people who cannot afford to pay their full sum of back taxes.
On a general note, each IRS tax option considers the following factors:
- Taxpayer’s monthly income, monthly expenses, assets, and liabilities
- What the taxpayer owes in total (including interest and penalties)
- The taxpayer’s ability to make income in the future
- Physical assets and properties like cars, homes, and high-value items
- Financial assets the taxpayer has like 401ks, savings accounts, IRAs, stocks, and more
Keep in mind that each case is 100% unique. A tax relief professional can help you analyze your specific financial situation (you search for one using our site) and provide you the best resolution by law.
Offer in Compromise
An Offer in Compromise (OIC) is best suited for a taxpayer with severe financial trouble. The taxpayer offers to pay a specific amount, and the IRS either accepts or rejects the offer. In 2021, the IRS approved less than a third of all OICs.
Partial Payment Installment Agreement
Over 2.3 million taxpayers entered installment agreements in 2022. An installment plan is best for someone with a little disposable income because the IRS demands consistent monthly payments for up to seven years (sometimes longer) or before their tax amounts owed expire.
The IRS offers several types of payment plans. Choosing the best one typically depends on how much the taxpayer owes. Keep in mind that, like other installment agreements, the IRS also charges interest.
However, a partial payment installment is generally much lower than what the IRS typically requires someone to pay each month on a regular installment agreement. The IRS will make the taxpayer pay what they can afford each month. If the taxpayer’s income does not change, most of their taxes could expire before they pay off the entire amount they owe. The taxpayer wouldn’t owe the remainder of that taxes since the IRS only has ten years to collect.
Financial Hardship and Currently Non-Collectible Status
The IRS looks at each hardship application on a case-by-case basis and generally requires financial disclosure. The taxpayer will need to show what they spend on rent, food, and bills each month along with their income.
If granted, non-collectible status doesn’t erase the person’s taxes. It’s not an IRS tax forgiveness program – it just stops the IRS from attempting to collect for a specific timeframe.
However, non-collectible status does NOT extend the collection statute expiration date.
The IRS only has 10 years to collect tax that a taxpayer owes (with certain exceptions that toll the statute of collections). When the tax expires, the IRS cannot pursue liens, levies, or other methods to collect the money.
In other words, a taxpayer’s tax liability very well could expire before their financial status improves whereby they would be required to pay back the taxes.
Penalty Abatement & First-Time Penalty Abatement
Penalty abatement and first-time penalty abatement are programs offered by the IRS to reduce or eliminate penalties imposed for non-compliance. Penalty abatement is a great relief option, while first-time penalty abatement specifically targets taxpayers with a clean compliance history.
Sometimes the first-time penalty abatement program is referred to as the one-time IRS forgiveness program. However, this is not a term that is used by the IRS, this is a term used by marketing companies that are trying to use fancy marketing tactics to drive you to take advantage of their services by offering a readily available option to taxpayers to reduce some of the taxes they owe. Be cautious of these tactics and avoid talking with companies that use this term because it really is just the first-time penalty abatement they are talking about that is an easy filing or quick phone call to generally eliminate a low number of penalties.
File for Bankruptcy
Sometimes a taxpayer can discharge taxes under bankruptcy filings, which some might argue equates to IRS one-time forgiveness. However, bankruptcy isn’t always possible as there are various rules that must be met. When in doubt, contact a bankruptcy attorney.
Innocent Spouse Relief Program
In most cases, spouses who file joint taxes are equally responsible for outstanding taxes owed – even after a divorce. If one spouse can prove they didn’t contribute to the taxes owed, they might qualify for an innocent spouse relief IRS tax forgiveness program.
IRS Fresh Start Initiative
The Fresh Start is not a program or a specific resolution that the IRS offers. Instead, this refers to a series of reforms to the IRS code that makes it easier for people to pay off their taxes. More taxpayers now qualify for IRS tax forgiveness programs like installment plans and OICs. Moreover, due to the Fresh Start Initiative, the IRS rarely files liens for taxpayers who owe under $10,000.
People First Initiative and IRS Tax Forgiveness for COVID-19
The CARES Act and People First Initiative gave taxpayers an instant filing and payment extension, which pushed the deadline to July 15. The IRS also halted levies, garnishments, and liens during this period.
After July 15, however, IRS’s business continued as usual. Congress is currently working on another COVID-19 public assistance bill, but funds earmarked for liens, levies, or back tax relief don’t look promising.
However, debtors may now borrow up to $100,000 from their IRA without incurring a tax penalty if they pay it back within three years. This is an attractive option for those looking to avoid interest rates from other IRS payment plans.
Need Some Professional Help Navigating IRS Tax Forgiveness Programs?
Back taxes, liens, levies, and garnishments are all scary business. While it’s always best to pay taxes in full, that’s not an option for everyone. A licensed tax professional can review your options. Remember, it’s always better to proactively address tax problems.
Don’t face the IRS alone – help is available! Start searching for a tax professional by starting your search by clicking on "Find a Local Tax Pro" above. At TaxCure we list experienced tax professionals around your area that can help.