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Getting a letter in the mail from the IRS can be frightening, especially when it’s a letter telling you that you owe money for back taxes. But unfortunately, it happens, and as we get closer to the last filing day of the tax season, more people will start to receive these letters, whether they underestimated their self-employed tax payments or simply could not afford to pay what they owed at tax time last year.
What can be more troubling is that the back taxes you owe to the IRS typically don’t just include the principal balance you started with. When you’re behind on your taxes, what you owe can be compounded by escalating penalties and interest, causing the balance to grow and making it less affordable to pay off what you owe.
So what options exist to get rid of your IRS tax debt before it crushes you financially? And is it possible to have your tax debt forgiven? The short answer is yes, there are ways to decrease what you owe to the IRS in certain cases. Below, we’ll detail some of the potential paths you can take to move toward IRS tax debt relief.
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Can I get my tax debt forgiven? 5 options to consider
If you’re dealing with back taxes and aren’t sure how to lessen the financial load, the following options could help:
Use a professional tax relief service
Given the documentation and negotiation complexities that are involved with resolving back taxes, many taxpayers opt to use professional tax relief services to help resolve their IRS debts. These services provide expert tax debt representation, compiling all required documentation for your circumstances and directly handling all communications with the IRS.
For example, reputable tax relief companies typically have tax experts and former IRS agents on staff to closely review your full financial situation and explore all available relief programs that you may qualify for to help you cut down on your tax burden. In certain cases, these services may also help to negotiate with the IRS to forgive a portion of what you owe in back taxes.
But while legitimate services can be very helpful, you should also beware of the red flags that indicate a tax relief company is problematic. Making unrealistic “pennies on the dollar” promises is one, as the IRS has strict criteria that must be met. And, most reputable firms will provide a free initial consultation to evaluate your options, so if a company is trying to charge you before enrolling in their services, you may want to think twice.
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Utilize the offer in compromise program
Another possibility is the IRS offer in compromise (OIC) program. An OIC allows you to settle the full tax debt for a reduced lump sum payment. However, the IRS will want to see proof that your full income and assets cannot realistically cover the total balance owed, even with an installment plan.
To qualify for an OIC, the amount you offer as a settlement must generally be the most the IRS could expect to collect within a reasonable period, based on your provable income, expenses, asset equity and future earnings potential. The IRS sets strict criteria, so hardship documentation is crucial for acceptance. Even if approved, you must stay compliant on all future taxes as a condition.
Request a currently not collectible (CNC) status
If you are legitimately unable to pay anything toward your tax debt due to current financial hardship, you can request a currently not collectible (CNC) status. CNC status provides only temporary relief, though — it does not permanently eliminate your tax debt. But while your tax debt isn’t technically forgiven in this case, a CNC status still delays IRS collections indefinitely and prevents further penalties and interest from accruing on your account.
To be considered for CNC status by the IRS, you must prove your reasonable household income is insufficient to maintain basic living expenses, with limited asset equity to satisfy the liability. As part of this process, the IRS will typically require you to produce documentation of your finances, monthly income and expenses, assets and hardship circumstances.
File for bankruptcy
For those in extreme financial distress, filing for bankruptcy may potentially allow certain old tax debts that meet very specific criteria to be discharged (forgiven) in the bankruptcy. This includes income tax debts over three years old which were filed on time originally and meet other non-fraud provisions.
However, recent larger outstanding balances often don’t qualify for elimination in bankruptcy, and neither do many specific types of tax debts, like back taxes that were never filed for, payroll taxes or fraud penalties. Filing for bankruptcy can also damage your credit score temporarily, so it’s important to fully understand the potential repercussions and the limitations on the potential benefits before taking this route.
Agree on a payment plan
While a payment plan won’t result in the IRS forgiving some or all of your tax debt, in many cases, the path out of significant IRS debt means agreeing to make installment payments on what you owe. The IRS has both short-term payment plans of 180 days or less and long-term installment agreements where taxpayers have up to six years to pay (or potentially longer if the IRS agrees).
While you won’t get direct tax debt forgiveness with this option, a payment plan prevents future penalties from continuing to accrue. That can keep your tax debt from growing as you pay it off, potentially saving you money on what you owe in the long run.
To qualify, you must verify your income, expenses and asset information to the IRS and then get on an approved monthly payment schedule, which is created based on your ability to pay. Payment plans require resuming tax compliance and staying current on future taxes.
The bottom line
Facing down an accumulating tax debt can feel overwhelming, but knowing that there are relief programs and professional services available to potentially settle or restructure the IRS burden you’re carrying can provide hope. By thoroughly exploring all your options for resolving your tax debt, you can take back control of the situation and resolve the crisis decisively with the option that works best for you.