Who Qualifies for IRS Forgiveness?

You’ve probably heard about IRS tax forgiveness – this phrase is used heavily in tax relief advertisements, and it’s an enticing idea for people with tax debt. So, is it real? Is it possible? Yes, the IRS does forgive some taxes – but only if you qualify. 

To help you out, this post explains who qualifies for IRS forgiveness and which forms to use to apply. It also separates fact from fiction to help you find real relief from your tax problems. 

What is IRS tax forgiveness? Is it real?

IRS tax forgiveness refers to situations where the IRS forgives taxes or penalties. It’s possible, and it’s not even that rare. But here’s the confusing part – there’s no IRS program called the IRS tax forgiveness program. Instead, there are a variety of IRS programs that let you pay less (or nothing at all) in tax and penalties. 

If you want forgiveness, you need to figure out two things:

• Which IRS program to apply for, and

• Whether or not you qualify

The phrase “tax forgiveness” is popular because it’s used by big tax relief firms – and sometimes, the smaller firms as well. They like to use this phrase to draw in taxpayers with problems. That’s fine, but you need to go in with your eyes open.

If you contact a tax relief firm, and they talk about tax forgiveness or the Fresh Start Program as if it’s a real program, that’s a red flag that they’re not transparent. If they say you’ll qualify for forgiveness before they know anything about your finances, that’s another sign that they might be a little shady – these programs have strict qualification and application requirements. 

Who qualifies for IRS forgiveness?

Again, there are different programs to apply for, but you may qualify for IRS tax or penalty forgiveness if:

• You’re dealing with first-time penalties.

• You have limited income and assets and can’t afford to pay in full. 

• You can’t afford to pay anything right now.

• You can only afford very small monthly payments.

• There is a legitimate doubt that you really owe the tax.

• Your former spouse incurred the debt without your knowledge.

• The tax debt is so old that the IRS collection period has expired.

All of these scenarios apply to different IRS programs. If you think you might qualify for forgiveness based on the above list, the next step is to figure out which program applies to that situation. 

Don’t worry – you don’t need to do this on your own. When you contact a tax relief attorney, they’ll assess your situation and find the best program for you.

Which tax forgiveness program do I qualify for?

Let’s take a look at the IRS tax forgiveness programs based on the different ways you can qualify. 

Dealing with first-time penalties

The IRS offers first-time abatement (FTA) to taxpayers who’ve incurred late filing, late payment, or late deposit penalties for the first time in four years. You automatically qualify if you have paid, filed, or deposited taxes on time for the previous three years. The IRS will also waive penalties if you have reasonable cause, which is when events out of your control (fires, floods, deaths, disasters, etc.) prevent you from filing or paying on time. 

To apply, call the IRS or file Form 843. 

Can’t afford to pay in full

If you can’t afford to pay in full, the IRS may agree to settle your tax debt with an offer in compromise. You pay the settlement, and the IRS waives (forgives) the remaining balance. However, you must prove that you’re paying as much as possible based on your income and assets. 

To apply, use the Form 656 booklet. But for the best results, work with a tax attorney, as about half of all applicants get rejected.

Can’t afford to pay anything right now

Say your income all goes to essential expenses, and you don’t really have any equity in your assets. Then, the IRS may agree to label your account as currently not collectible and stop all collection action against you. This isn’t a true forgiveness program – the IRS doesn’t actually forgive the tax due. Instead, they just stop the collection activity until your finances improve. If the pause lasts until the collection period expires (typically 10 years), you won’t have to pay the remaining amount.

To apply, contact the IRS directly or reach out to a tax attorney. You generally have to complete a financial disclosure, such as Form 433-F, or provide other information to prove you can’t afford to pay. 

Can only afford a small monthly payment

If you set up payments on your IRS tax debt, the payments should typically pay off the bill before the collection period ends – for example, if you owe $120,000 and you set up payments right away, you can take up to 10 years to pay, making your monthly payments about $1000. 

However, if you can’t afford to pay that amount, you may qualify for a partial payment installment agreement (PPIA). With a PPIA, you make payments until the collection statute expiration date (CSED). And then any amounts due at that point are waived. For example, if you owe $120,000 and can only afford to pay $100 per month, you may end up paying about $12,000 over 10 years, and the rest will be forgiven.

To apply, you typically start the application process for a traditional installment agreement, and then you provide a financial disclosure to show you need a reduced monthly payment. Note that the IRS will review your finances roughly every two years, and they may require you to make larger payments. 

Like the CNC option, a PPIA doesn’t forgive taxes upfront. Instead, it sets you up with a program where the taxes may get forgiven down the road – but only if you stay compliant with the program and your finances don’t improve to the point where you can afford to pay in full. 

Have a legitimate doubt that you owe the tax.

During the tax assessment process, there are several points where you can appeal the tax due. For example, if the IRS audits your return and assesses tax against you, you have the right to appeal the audit results. But sometimes, people miss their appeal windows and get stuck with a tax liability that they don’t really owe. 

If this describes your situation, you may qualify for partial or full forgiveness of the tax liability under a program called Offer in Compromise Doubt as to Liability (OIC – DATL). For best results, you should always work with a tax attorney, as they know how to leverage the tax code and make effective arguments. Depending on the situation, there may be other ways you can appeal the tax due. 

To apply for an offer in compromise based on doubt as to liability, use the 656 booklet, or contact a tax attorney directly to see if there’s a more effective way for you to dispute the tax owed. 

Dealing with tax debts incurred by your spouse

If your former spouse incurred a tax liability without your knowledge, you may qualify for innocent spouse relief. Typically, the tax must have been understated on a jointly filed return – in other words, you filed together, your spouse didn’t report some of their income, and you didn’t know about the income. And you must no longer be married – you may be widowed, divorced, or legally separated. However, there are a few different versions of this program, and you may be able to qualify even if your situation doesn’t fit this exact criteria. 

To apply, file Form 8857. The form allows you to apply for three different types of spousal relief based on your unique situation. 

Have very old tax debt

The IRS only has 10 years to collect most tax debts – the collection period can get paused for a range of reasons, and the extra time gets added to the end. For example, if you apply for a settlement, the collection period gets paused and extended. You can find the exact collection expiration date for your tax debt by checking your IRS online account or asking a tax attorney. Once the debt expires, the IRS can no longer collect, so it’s effectively forgiven. 

To apply, you don’t need to do anything, but that’s typically a risky strategy. To ensure the IRS won’t move forward with involuntary collections, you may need to secure a PPIA or CNC status. But that said, you don’t want to draw attention to your case if you don’t have to. Talk with an attorney about the best plan of action if your tax debt is about to expire. 

What if you don’t qualify for IRS forgiveness?

If the above programs don’t apply to you, then your main option is to set up monthly payments on your IRS tax debt. Here’s an overview of what to expect if you go on an installment agreement:

• Make payments for up to 10 years (or until the collection expiration date, if sooner). 

• Apply online if you owe less than $50,000 – contact the IRS or a tax attorney if you owe more.

• Interest (adjusted quarterly) plus a 0.25% penalty will accrue monthly – the faster you pay off the debt, the less you pay in interest and penalties.

• The IRS will seize your tax refunds and apply them to your bill.

Don’t assume you should set up payments – a significant portion of taxpayers who set up monthly payments could have qualified for some type of forgiveness. That’s why IRS payment plans have such high rates of default – once you default, the IRS can go after your assets. 

To ensure this is the best option for you, reach out to a tax attorney for guidance. 

Get your tax debts forgiven – or learn about other options

Don’t fall for slick marketing pitches – if a company’s pushing forgiveness and telling you that you can qualify before they know anything about you, that’s a sign that you should look for a different professional to help you. 

Only the IRS can approve applications for tax forgiveness or other relief programs. Most experienced tax attorneys can give you a good idea of whether or not you’ll qualify – but only after they know a bit about your situation. 

Want to find the best type of relief for your situation? Wondering if you qualify for partial or full penalty forgiveness? Then, contact us at Paladini Law today. We’ll help you get back on track with IRS taxes – we can also help you deal with state taxes and any other tax problems facing you or your business. Don’t wait – contact us so we can solve this problem together.