Have you accumulated tax debt? If you have debt with the IRS and cannot pay your tax balance, you need to learn about the options available to you. Short of speaking with a tax professional, what can you do to avoid serious consequences like wage garnishment to cover your back taxes?
In some scenarios, you may qualify for an installment agreement or payment plan. But if you can’t meet the payment terms, it may be helpful to learn about the other programs available to you, such as the IRS debt forgiveness program. Here is a quick rundown of how IRS debt forgiveness can work, along with some other information you will likely find helpful.
IRS tax debt forgiveness programs: IRS Fresh Start Initiative Offer in Compromise Program
In 2008, the Internal Revenue Service (IRS) launched the Fresh Start initiative to offers taxpayers programs to help them manage their tax bill and pay off back taxes. In 2012, new provisions were added, including an expansion of the Offers in Compromise (OIC) program.
“The IRS Fresh Start Initiative relaxed the guidelines on several IRS resolution programs, making it possible for more consumers to qualify for tax relief. For some programs such as installment agreements, consumers can obtain longer repayment programs, making the monthly repayment amount more affordable,” says Harry Langenberg, co-founder of Optima Tax Relief.
“In the case of other programs, such as Offer in Compromise, the IRS is more flexible when evaluating a consumer’s ability to repay the debt, enabling more consumers to qualify for the tax debt reduction program. The changes brought about by the Fresh Start Initiative are a win-win for the IRS and taxpayers. The IRS receives revenue it may have otherwise not collected, and taxpayers can resolve their outstanding debt,” adds Langenberg.
To qualify for this debt forgiveness program, the IRS must determine that the amount you offer to pay is the most it can expect to collect on your tax debt within a reasonable period. For this, the IRS will need information on your income and assets to help it determine if it believes you can instead pay the full amount of your tax debt in a lump sum, payment plan, or through an installment agreement.
Although you can try to do this by yourself, you may want to get tax help from an expert. Some companies provide a free initial consultation that helps you determine what your options are. If you qualify, follow these steps to apply:
- Complete the 656 Offer in Compromise form, the 433-A OIC form for individuals (if applicable), and the 433-B OIC form for business tax debt (if applicable).
- Pay $186 for the application fee.
- Include your initial offer payment.
If you meet Low-Income Certification requirements, the IRS will waive the application fee and initial offer payment.
What other kinds of Fresh Start programs exist?
If you don’t qualify for the Offer In Compromise program, there are other Fresh Start programs that help taxpayers struggling to pay their IRS debt. They do not offer debt forgiveness, but they can help reduce your tax debt. Here’s more information about them.
When a taxpayer accrues a tax debt, the government will file a lien notice. The Fresh Start program increases the amount you can owe before the IRS files a tax lien to $10,000 with a few exceptions.
If you receive a federal tax lien, you can request that the IRS withdraw it if you enroll in a direct debit installment plan. To apply for your lien to be withdrawn, you will need to submit Form 12277.
Fresh Start also expands access to installment agreements. Through these, individual taxpayers can set up direct debit installment plans to pay off up to $50,000 in tax debt over a period of six years. Here are the two plans available:
- Short-term payment agreement: You can qualify with up to $100,000 in tax debt, penalties, and interest. There is no set-up fee, you must create a direct debit from a checking account, and you must pay off the debt in 120 days or less. Penalties and interest will continue to accrue.
- Long-term payment agreement: The maximum amount you can owe in taxes, interest, and penalties is $50,000 for this plan. Further, you’ll pay a $31 set-up fee, must set up a direct debit from a checking account, and will owe accrued penalties and interest until the amount is paid off in full. (If you don’t set up the direct debit, you can still get a plan, but you will need to pay $149 for the set-up fee.)
Businesses can also apply for a payment plan as one of the ways to handle back taxes, but the limit on the amount you can owe is $25,000,
IRS forgiveness program: Does forgiveness of tax debt exist after 10 years?
Tax forgiveness, per se, does not exist, but the government does have limits that go into effect after 10 years. “There is a statute of limitation on IRS collections, which starts after the tax is assessed,” Eisenkraft explains. “It is not the original filing due date. Note that if you filed a fraudulent return, the IRS could pursue you indefinitely.”
She adds, “The 10-year statute of limitations can be extended in certain cases. For example, if you file an Offer in Compromise, the statute is extended while it is pending, so the collection potential can be longer than 10 years. If 10 years pass after the IRS assesses your taxes, the government cannot legally collect the debt for that tax return.”
Other exceptions that can extend your debt past 10 years include filing for bankruptcy protection or a Collection Due Process Hearing Request.
IRS forgiveness program: I owe the IRS but can’t pay
If you do not have the ability to pay your IRS debt, as may be the case if you’re experiencing financial hardship, there are two other things you should keep in mind:
Low Realistic Collection Potential
The first thing is that the IRS will not pursue collection activities on a debt from a person who presents a Low Realistic Collection Potential (RCP). The IRS considers a low RCP to be a debtor who has low-income, no bank account, no assets, and no way to pay their tax liability.
Eisenkraft explains, “Some of the situations that would put someone in an RCP category would be illness, age, the future earnings potential, etc. The IRS will check to see if there is a realistic possibility to get the funds in the future. Let’s say someone 63 years old loses their job. They may have Social Security, a large pension, many investments, etc. On the other hand, they may barely have enough social security to survive on, high medical bills, etc. Each case stands on its own.” While the IRS does not forgive your taxes if they consider you low RCP, they won’t try to collect them.
Currently Not Collectible (CNC) status
The second is Currently Not Collectible status. “If you are suffering hardship, you may be able to request CNC status from the IRS. This is a status where the IRS will not try to collect the money due and usually leave you alone for two years when they will revisit your financial situation,” says Eisenkraft.
She adds, “So if you have a debt, and otherwise can just about make ends meet, or there is an illness or other reasonable cause such as job loss, etc., you have time to get things back in order. Interest and penalties will continue to accrue, but you can breathe knowing that you can go to the ATM and not have your assets frozen.”
If you think you may present low RCP or qualify for CNC status, you can contact the IRS or consult a tax professional for more information.
IRS forgiveness program: Call in a tax resolution expert
Falling behind on your tax debt can be very stressful and expensive. But it is not something you want to ignore. As Eisenkraft says, “If you are struggling with tax debt, you need to address it. Ignoring it doesn’t make it any better, and the consequences can be disastrous. If you do nothing, the IRS and/or State can empty your bank account, garnish your wages, etc. It’s always better to do this on your terms instead of theirs.”
To browse a list of tax resolution companies, compare offerings, and read real-user reviews, click here.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.