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Back Taxes and Tax Debt

How to Apply for Tax Debt Relief or Forgiveness from the IRS

Mark Steber Chief Tax Information Officer Published On August 20, 2019

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The good news? Tax debt relief is possible. The not-so-good news? Not everyone qualifies for a settlement, but there are several options to explore and consider. The IRS offers a variety of tax debt relief programs and a lot of online tools and forms to make it easier to apply for them. If you are overwhelmed by the complexity of your situation, consult a professional. Either way, it’s best to deal with tax debt as soon as possible.

What to know before you ask for IRS tax debt forgiveness

Understand why the IRS is saying you owe and whether you agree with it. If you haven’t already, read our 5 steps to getting your tax debt under control before you contact the IRS. If you feel the IRS has made a mistake or has calculated something incorrectly, it may be time to bring in a tax resolution specialist to clarify the issue before taking action to resolve it.

Requirements for tax debt forgiveness or settlement

  • You must be up to date on filing all tax returns
  • Your state income taxes must be paid
  • You cannot be currently in an open bankruptcy proceeding
  • For installment payment agreements, there are some other requirements:
  • You can’t owe more than $100,000 in tax debt — more below
  • You need to be able to make monthly payments to the IRS
  • You are expected to pay on time for the agreed-upon term

The amount you owe can further limit your options:

  • If you owe $50,000 or less in combined tax, penalties, and interest, you may be able to apply for a long-term payment plan (>120 days up to 72 months).
  • If you owe less than $100,000 in combined tax, penalties, and interest, you may be able to apply for a short-term payment plan (up to 120 days).

You’ve determined whether you may be eligible for tax relief—now what?

Depending on your situation, here are the main relief options to consider.

Currently not Collectible

This one is pretty straightforward: if paying your tax bill would mean that you could not afford basic living expenses, you can request that the IRS classify your account as “currently not collectible.” Keep in mind: This does not erase any of your tax debt—nor does it stop penalties and interest from accruing—but it does delay IRS attempts to collect it.

Innocent Spouse Program

If you filed jointly, but weren’t aware of something your spouse (current, former, or separated) did wrong on your return To request relief under this provision, you would need to show that you did not know your spouse failed to report some income, reported it improperly, or claimed deductions or credits that weren’t allowed. There are three types of relief.

  • Innocent Spouse Relief: This relieves you of the responsibility for paying taxes, interest, and penalties on what your spouse did wrong on the tax return.
  • Relief by separation of liability: Essentially, this relief allows you to divide the taxes, interest, and penalties due (because of an understatement made by one spouse on a joint return) between you and your spouse (or former spouse).
  • Equitable tax relief: Don’t qualify for one of the other two? This relief may still be an option, but there are many conditions to meet. The most important thing you should know: you can only get equitable relief from an understatement of tax or an underpayment of tax.

Garnishment/Levy Release

Most people have heard of wage garnishment, but not everyone has heard of a levy. In short, they have the same effect: money or assets are taken by the government for something you owe. Yes, the IRS can empty your bank account, keep future tax returns, and even seize and sell your property (including cars) to satisfy a debt. What can you do? If a levy or garnishment leaves you with too little money to pay for basic, reasonable living expenses, you can request a modification or release of it due to the economic hardship it causes. 

Bankruptcy

This isn’t the silver bullet some think it is. Filing Chapter 7 and Chapter 13 bankruptcy, and successfully completing your bankruptcy plan may qualify you for a discharge (release from personal liability) of tax debt, but not for certain. It can also damage your credit, make borrowing more difficult, and have generally dire financial consequences. If you have already filed for bankruptcy, or think you might, be sure to discuss tax implications with your attorney. 

Offer in Compromise

See the fourth action item in our “What to do if you can’t pay your taxes” article for a longer explanation of this option. To see if you may qualify for an OIC, use the IRS’ pre-qualifier tool or speak with a tax specialist. Remember, the IRS does not approve many of these so it is a long shot. 

Statute of Limitations

This is a really long shot, which is why we have listed this last. After the date your tax debt is assessed, the IRS has 10 to collect taxes, interest, and penalties from you. And, as you’ve read, they have plenty of ways to do it. Nonetheless, some tax lawyers or advisors will try to use the statute of limitation to resolve a tax case.

Is a tax debt relief program right for you?

There’s a good chance one of the above options can help you settle your IRS tax debt. If you need help or advice about which one (or more) might be a good fit for your circumstances, don’t hesitate to get advice from a tax professional. Contact us for a free consultation as part of Jackson Hewitt’s Tax Resolution Services.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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