How to Get the IRS to Forgive Tax Debt

Most taxpayers don’t realize that they can get the IRS to forgive tax debt in some circumstances. Typically, this arises when you cannot afford to pay your taxes but there are a few other instances where forgiveness applies. However, applying for these programs can be confusing and it is best to consult a tax lawyer to help guide you through the process. Here are a few options you may qualify for to reduce what you owe.

Offer in Compromise (OIC)

An IRS OIC is a settlement agreement in which the taxpayer’s liability is generally reduced to an amount that the taxpayer can afford to pay, not what the taxpayer owes. Typically, the taxpayer must pay an amount equal to or greater than the amount that the IRS could reasonably collect from the taxpayer.

Taxpayers can only qualify for an OIC on three grounds: (1) Doubt as to the taxpayer’s liability; (2) Doubt as to the collectability of the debt; or (3) Paying the debt in full would cause an economic hardship or compelling public policy or equity considerations permit the OIC.

Note that the IRS will delve into the taxpayer’s finances to determine how much they can afford to pay.

Penalty Abatement

If the IRS added penalties to your tax bill, you may get those penalties removed or abated if you fall into one of these categories:

• You have a sound reason for failing to pay your taxes, such as natural disaster, inability to obtain records, death, serious illness, or other reason that would establish that you used all ordinary business care and prudence to meet your tax obligation but were unable to do so;
• You have not been assessed any other penalties of a “significant amount” on the same type of tax return within the past three years; or
• You relied on incorrect written advice from the IRS.

Partial Payment Installment Agreement (PPIA)

This is available for taxpayers who can only afford to pay a portion of their tax debt. The IRS looks at the taxpayer’s assets and income less reasonable expenses to determine whether they qualify. Taxpayers must provide a financial statement and supporting documentation. Notably, the IRS will review the installment agreement every two years and can change the terms.

Currently Not Collectible (CNC) Status

Generally, CNC status does not forgive tax debt but does stop collections temporarily. To qualify, taxpayers must show that they cannot pay both their taxes and basic living expenses. While the taxpayer’s account is in CNC status, the IRS generally won’t try to collect, but will still assess interest and penalties and may keep and apply tax refunds to the tax debt. As with the PPIA, the IRS will periodically review the taxpayer’s financial situation and may remove them from CNC status if it is determined that they can pay some or all of their liability. If the taxpayer is still on CNC status when the statute of limitations runs out, their debt may be forgiven.

Innocent Spouse Relief

Normally, spouses filing jointly are 100% liable for the taxes owed. However, in certain circumstances, an innocent spouse who did not know or have reason to know about the understatement of taxes can get their tax liability reduced or eliminated.

Getting your tax debt reduced or forgiven is complicated and often requires that you provide detailed documentation of your finances. Consult an attorney to help ensure you present the best case for forgiveness. For help with your matter, contact our firm.