Dealing with IRS tax debt can be stressful and overwhelming. Whether you owe a small amount or significant back taxes, the consequences of failing to resolve tax debt can lead to wage garnishments, bank levies, tax liens, and other serious financial hardships. Fortunately, the IRS offers several tax relief programs that may help reduce the amount you owe or provide a manageable way to pay off your debt.
In this guide, we will explain the IRS tax debt relief programs available, how they work, and how to determine if you qualify for them. Let’s explore your options for gaining control over your tax debt.
What is IRS Tax Debt Relief?
IRS tax debt relief refers to the programs and solutions offered by the Internal Revenue Service (IRS) to help taxpayers who owe back taxes but are unable to pay them in full. These programs are designed to provide a way for taxpayers to resolve their debts, reduce the burden of unpaid taxes, and avoid severe penalties or collection actions.
The IRS offers several relief options depending on the taxpayer’s situation, including Offer in Compromise, Installment Agreements, and Currently Not Collectible status, among others.
IRS Tax Debt Relief Programs
Here are the primary IRS tax relief programs available to help you reduce or pay off your tax debt:
1. Offer in Compromise (OIC)
An Offer in Compromise is a program that allows eligible taxpayers to settle their tax debt for less than the full amount owed. This program is designed for taxpayers who cannot afford to pay their full tax liability or for whom paying the full amount would cause financial hardship.
To qualify for an Offer in Compromise, you must meet certain eligibility requirements, including proving that you are unable to pay the full amount or that doing so would create significant financial distress.
The IRS considers several factors when determining whether to accept an OIC, including:
Your ability to pay: This includes your income, assets, and expenses.
Your income: The IRS will review your monthly income and determine if you can pay the full debt over time.
Your expenses: Necessary living expenses are taken into account to determine what is left over to apply to your tax debt.
The amount you owe: The IRS will evaluate whether the amount you owe is realistic for you to pay based on your financial situation.
2. Installment Agreement
An Installment Agreement is a payment plan that allows you to pay your tax debt in smaller, more manageable monthly payments. If you cannot pay your tax debt in full right away, the IRS may allow you to set up an installment agreement to spread the payments over time.
There are different types of installment agreements:
Guaranteed Installment Agreement: If you owe $10,000 or less and have filed your tax returns for the past five years, you may qualify for a guaranteed installment agreement. The IRS will not reject this request, as long as the debt is under the threshold.
Streamlined Installment Agreement: For taxpayers who owe between $10,000 and $50,000, a streamlined installment agreement may be available. This is typically a faster process for setting up a payment plan without the need for financial disclosure.
Non-Streamlined Installment Agreement: If you owe more than $50,000 or have a more complex financial situation, you may need to provide additional financial information before the IRS approves your installment agreement.
3. Currently Not Collectible (CNC) Status
If you are facing severe financial hardship and cannot afford to pay any part of your tax debt, you may be eligible for Currently Not Collectible (CNC) status. When placed in CNC status, the IRS temporarily stops trying to collect your tax debt. While you will still owe the debt, the IRS will not take enforcement actions like wage garnishments or bank levies while you are in CNC status.
To qualify for CNC status, you must show that paying your tax debt would cause financial hardship. Typically, you will need to provide detailed financial information, including proof of income, expenses, and other financial obligations.
It is important to note that CNC status is not a permanent solution. The IRS may review your financial situation periodically, and if your circumstances improve, they may resume collection efforts.
4. Penalty Abatement
If you owe taxes and have been charged penalties for failing to file or pay on time, you may be eligible for penalty abatement. This program allows you to request the IRS to remove or reduce penalties associated with your tax debt.
To qualify for penalty abatement, you must demonstrate reasonable cause for why the penalties were incurred. Some common reasons for penalty abatement include:
Serious illness: If you were unable to manage your tax affairs due to illness or injury.
Natural disaster: If you were affected by a natural disaster that impacted your ability to file or pay taxes on time.
Incorrect IRS advice: If you relied on incorrect advice from an IRS representative and were penalized as a result.
It is important to note that penalty abatement does not reduce the amount of tax debt owed; it only removes or reduces the penalties imposed on the debt.
5. Currently Not Collectible (CNC) Status
If you are experiencing significant financial hardship and cannot afford to pay any portion of your tax debt, the IRS may grant you Currently Not Collectible status. This means that the IRS temporarily stops attempting to collect your tax debt.
While in CNC status, you will not face collection actions like wage garnishments, bank levies, or tax liens. However, interest and penalties will continue to accrue on the amount owed, and the IRS may review your case periodically to determine if your financial situation has improved.
6. Bankruptcy
In some cases, filing for bankruptcy may be an option to resolve IRS tax debt. However, only certain types of tax debt can be discharged in bankruptcy. Income taxes may be discharged if they meet certain criteria, such as being at least three years old and meeting other requirements.
It is important to consult with a bankruptcy attorney or a tax professional to determine whether bankruptcy is a viable option for resolving your tax debt.
How to Qualify for IRS Tax Debt Relief
To qualify for IRS tax debt relief programs, you typically need to meet certain criteria. Each program has specific requirements, but common factors include:
Your ability to pay: Many programs, such as the Offer in Compromise, require proof that paying the full tax debt would cause significant financial hardship.
Timely filing of taxes: In most cases, you must have filed all required tax returns to be eligible for relief programs.
Financial documentation: Programs like installment agreements and the Offer in Compromise require you to provide detailed financial information, including income, expenses, and assets.
Reasonable cause: For penalty abatement, you must demonstrate that there was a valid reason for missing deadlines or incurring penalties.
How to Apply for IRS Tax Debt Relief
The process of applying for IRS tax debt relief varies depending on the program. Generally, you will need to:
Determine which program is right for you: Assess your financial situation and determine which relief program fits your needs.
Complete the necessary forms: Each program requires different forms, which can be found on the IRS website. You may need to submit additional documentation to support your application.
Submit your application to the IRS: Follow the instructions provided for submitting your application. For an Offer in Compromise, for example, you will need to submit Form 656.
Wait for approval: The IRS will review your application and financial information. The approval process can take several months, depending on the program.
Call to Action: Get Help with Your IRS Tax Debt Today
If you are struggling with IRS tax debt, don’t wait to take action. There are several tax debt relief programs that may help you reduce your tax liability and avoid further financial hardship. Contact a tax professional or an experienced IRS tax debt relief attorney today to discuss your options and find the best solution for your situation.