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IRS Debt Forgiveness

Are you feeling the weight of IRS tax debt crushing your financial well-being? You’re not alone. Dealing with tax debt can be an overwhelming and stressful experience, but there’s a glimmer of hope: IRS debt forgiveness.

This blog post aims to shed light on the often misunderstood world of IRS debt forgiveness programs, providing you with the knowledge and tools necessary to take control of your financial future.

Whether you’re an individual taxpayer struggling to make ends meet or a business owner grappling with tax liabilities, understanding the options available to you can make all the difference.

Let’s guide you towards the path to financial freedom with these IRS debt forgiveness options.

What’s in This Post

Understanding IRS Debt Forgiveness

Is getting a Settlement with the IRS or States a real thing?

YES! This program is called the OFFER IN COMPROMISE Program with the IRS. It has also been called the ‘Fresh Start Initiative’ and other creative names but the basic program has been tweaked by almost every administration, but the overall program is the same.

Guardian Tax Law settles tax debt for as low as $20.00. We get these approved weekly.

Do States have a Settlement Program?

Most states also have an Offer In Compromise program too, but not all. Doing an Offer In Compromise with State tax debt is usually a LOT harder. Some states have decent programs and some are horrible.

  • NY – has a pretty good Offer In Compromise program. While more expensive than the IRS it is reasonable to get an offer approved.
  • CA – has one of the worst Offer In Compromise programs. Very few qualify and it is more expensive than NY’s program.
  • AZ – hates to accept Offers and will look to any reason to deny an Offer In Compromise.
  • KS – will accept reasonable Offers In Compromise.

Each State is different and has different requirements and policies.

How do I know if I qualify?

There are two major parts to any Offer. Assets and Income – Expenses. If you do not have a lot of assets, (or they can be ignored); and you don’t make enough income to meet normal living expenses – you very well might qualify.

Do I need to hire someone?

You can prepare and submit an Offer In Compromise on your own. However, that is the easy part. Making sure your case is actually ready to submit and that you are submitting the best Offer possible is where a GOOD Tax Professional can truly help.

The first response on almost every Offer from the IRS is a rejection. It isn’t a true rejection but the IRS telling you that you need to contact them within a short period of time, usually 7-10 days.

The IRS will then try to move your numbers around to claim you do not qualify. If they can, they will again reject your Offer. Contesting, negotiating with the IRS and even appealing your case is where expert advice is really needed.

How do I find a ‘GOOD’ Tax Professional?

Shop around. If a company uses high pressure sales tactics or they do not explain how the process works to you, RUN. If they do not explain to you how to STOP owing back taxes – they are not there to help you. If you owe again you will default any resolution negotiated, even an Offer In Compromise.

A GOOD Tax company will explain your Rights and Options to you. They will let YOU decide what is best for you but will make recommendations. They will encourage you to ASK questions and feel comfortable with your decision – no high pressure sales.

They will NOT threaten you and tell you that you are going to jail, your property will be seized etc. Those are usually flat out lies to scare you into hiring them.

Types of IRS Debt Forgiveness Programs

There are a few different IRS Debt Forgiveness Programs. Let’s review each one in detail.

Offer in Compromise (OIC)

What is an Offer In Compromise (OIC)?
An Offer In Compromise is an attempt to settle a debt for less than the total debt owed. Doing an OIC or settlement can save you thousands of dollars and stop all collections.

Many States also have OIC programs. Some of these programs are very difficult to qualify for while other states accept offers regularly. I will focus on the IRS Offer program in this article.

How do I qualify for an OIC?

Before submitting an OIC your case must be ready to submit an Offer. You must be compliant with your tax obligations or duties. There are two (2) parts to compliance.

  • First, is Filing Compliance: you need to have filed all required tax returns for the last six (6) years.
  • Second is Payment Compliance: you must be current on the tax payments for the current tax year. Offers are for past debts, not future debts. If the IRS thinks you will owe when you file your next tax return your Offer will NOT be even considered. Changing your withholding or paying Estimated Tax Payments is key to being ‘Payment Compliant’.

All balances must be finalized with the IRS. This includes Audits, Appeals, Exams.

To Qualify for an Offer your financial picture needs to match what they are looking for. There are two main parts to any Financial Analysis:

  1. Assets: the value of your Assets will be added together, and the value included in your offer amount. You can often still qualify if you have assets. Contact a tax professional to see how.
  2. Future Income: the IRS takes your monthly gross income and subtracts ‘allowable’ expenses to determine how much income you have available to put towards paying your back taxes owed.

This number is then multiplied by 12 or 24, depending on the type of Offer you submit.

WARNING – this number also needs to be multiplied also by the months remaining before your tax debts expire! This can be up to 10 years.

How do I figure out how much to offer to the IRS?

There are different kinds of Offers. You cannot offer $0.00, but you can offer as low as $1.00 if it matches your financial analysis.

Lump Sum Offer: Asset Value + (future income x 12) = Offer Amount.

This Offer needs to be paid within 5 months from when your Offer is accepted. 20% needs to be paid with a filing fee of $205.00 unless you have a fee waiger.

Deferred Payment Offer: Asset Value + (future income x 24) = Offer Amount.

The 24 payments need to start as soon as you file your Offer. If you miss a payment it can default your Offer process but it can give you more time to pay.

What do I need to submit with my OIC?

There are two forms that need to be prepared, the 433-a (OIC) and Form 656. These forms need to be sent with original signatures. If you don’t qualify for a fee waiver 2 fees must also be paid: $205.00 filing fee and the initial fee (20% of Offer for lump sum or first of 24 payments for a Deferred Payment OIC).

What documents need to be sent with my Offer?

What is required depends on the income and expenses of your case. If your income is consistent with your last filed tax return you often do not need to prove your income.

  • Bank Statements
  • Vehicle Loan Statements

Abatement of Penalties 

Aside from the IRS Offer In Compromise taxpayers can request an Abatement of Penalties and accompanying interest. There are two types of penalty abatement available to taxpayers with the IRS.

1st time Penalty Abatement.

This can be requested verbally over the phone when dealing with the IRS.  A 1st time Abatement can remove some of the penalties and interest for a given tax year if the taxpayer did not have any penalties or interest on the three (3) prior tax returns.


Example: Tony owes $20,000.00 for 2020. He also owes $4,000.00 in 2016. He paid his taxes on time for 2017 – 2019. Because he didn’t have any issues in the prior three (3) years before 2020 he should qualify for a 1st time Penalty Abatement for 2020. 


Tip: You can request a 1st time Penalty Abatement for multiple years as 2016 might also qualify if Tony didn’t have any penalties or interest in tax years 2013 – 2015. You might have to make a separate call for each abatement request though.

The penalties and interest that can be abated are limited to the following:

  • Failure to file timely
  • Failure to pay timely
  • Failure to Deposit (into the correct account)

More information on interest accrued from these penalties here: https://www.irs.gov/payments/penalty-relief-due-to-first-time-abate-or-other-administrative-waiver

843 Penalty Abatement.

This Penalty Abatement request requires a lot more effort and time than a 1st time Penalty Abatement. This is a written request that should be submitted with a completed form 843 for each year you are requesting an abatement. You should also submit written statements by the taxpayer/attorney, and any other documentation to substantiate what the claims of the taxpayer.

This process can take 9 to 18 months on average and needs to be tracked and followed up on to make sure the Abatement request is fully considered.

Reasonable Cause is needed: The IRS only abates penalties and interest if there is reasonable cause for the taxpayer not filing their tax returns, or paying them, or making a mistake.

Reasonable cause is the heart of an 843 abatement. This needs to be severe enough that a normal person could not have been expected to handle their normal tax obligations.

Examples: Death of a close family member, severe physical or mental illness, fraud committed by a financial advisor/CPA or tax preparer such that the taxpayer did not know of the issue, some sort of incapacity, etc. This is very fact specific and depends on the facts and proof that can be provided in each case.

Documentation of Reasonable Cause: is usually what makes or breaks a case. I have seen someone with a brain injury not qualify as they could not provide the doctor’s information about the disability.

Penalty abatements vary widely with the states. Some states will abate some penalties while many offer zero abatements.

Innocent Spouse Relief

This can be requested by a married person that filed jointly with their spouse but in most cases had no reason to know about income obtained by the spouse.

If the Innocent spouse didn’t know, or have reason to know about a side business, illicit activity or that their spouse had a lot more income than they disclosed on their taxes, the innocent spouse can get those taxes forgiven under their tax account.

The Purpose of Innocent Spouse is to protect spouses who had no reasonable way to know their spouse had more income than they reported on their tax return. 

Situations where Innocent Spouse consideration is NOT given: 

  • Divorce (except for victims of domestic violence), 
  • where the innocent spouse saw and enjoyed the unreported wealth regardless of whether they knew the income was reported or not.
  • If the case is not in a Community Property state.
  • Even if the spouse earned all of the income in the year- see c. ii.
  • If an Offer In Compromise or settlement in tax court has been offered.

In Conclusion, the easiest way to remove penalties and interest is 1rst Time Penalty Abatement

  • The 843 Abatement process
  • Innocent Spouse Relief

In practice it is often easier to just do an Offer In Compromise if the taxpayers qualify than to do an 843 Abatement or Innocent Spouse Relief. 

A good Tax Professional will review all of your options with you and plan out the most reasonable and cost- effective way to address or eliminate your tax debts and give you Peace of Mind.

Currently Not Collectible (CNC) Status

What can I do if I just don’t have the money to pay my taxes owed?

IRS v. States – what is a Hardship Status?

When someone is in financial difficulty and cannot afford to pay their tax debts the IRS and many states offer what is known as a Currently Not Collectible Status (IRS) or Hardship Status.

When a taxpayer is put into a Hardship Status they do not have to pay any monthly payments for 2 years (IRS) or less depending on the state. They will not have to worry about bank levies, wage garnishments or seizures as long as they stay in this status.

As long as a taxpayer still qualifies, their account can be put right back into the Hardship Status after the period ends until the debt expires or becomes unenforceable (states).

Does Tax Debt expire?

Almost all tax debts expire or become unenforceable. The IRS has roughly ten (10) years from when a debt is assessed to collect. After that time passes the debt expires and cannot be enforced anymore. Most state tax debt becomes unenforceable after 20 years, but this varies by state.

Understanding when tax debt becomes unenforceable is very helpful in planning and getting into a Hardship status protects taxpayers while the clock runs out on tax debt!

How do I qualify for a Hardship Status?

The IRS/States look at available assets and Income v. Expenses to determine if a taxpayer can afford to pay their tax debt in their current situation. Negotiating with the Government to show you meet their criteria by following their process and forms is how you qualify. This can be done over the phone or by submitting the right paperwork.

Do I have to be broke to qualify for a Hardship Status?

Absolutely not! We put people into Hardship Statuses that have equity in homes, retirement accounts, rentals, own businesses, etc. What makes the difference is knowing what your rights and options are as a taxpayer and how to protect your income and assets. We have protected plenty of taxpayers earning over $10,000.00 a month by putting them in a Hardship Status.

Using the Hardship Status for taxpayers can really help people out. Young families trying to get established and just need time to get on their feet before making payments, retirees that are on fixed incomes and will not be able to pay their back taxes, people that have fallen on hard times. We have helped people from homeless individuals to struggling business owners get the relief they need.

A Hardship Status might be the best option for you. It is just one of a few options to protect Taxpayers assets and income and give them peace of mind in dealing with Taxes.

Bankruptcy

Is Bankruptcy a good option to get rid of tax debts?

Bankruptcy laws started in 1800 and additional laws were passed in 1841 and 1867. Abraham Lincoln famously filed for bankruptcy in 1833. The idea behind bankruptcy laws was to encourage people to invest, create new businesses and take reasonable risks.

Bankruptcy laws and practice can vary by state and bankruptcy district. If you are considering filing for bankruptcy, you should always contact a local bankruptcy attorney to discuss your rights and options.

What do I need to know before filing for Bankruptcy

Filing for Bankruptcy can eliminate (discharge) debts and give you a new start. It does hurt your credit for at least 8 years but as individuals can recover from a bankruptcy in a matter of years if they can get on solid financial footing.

Bankruptcy can eliminate many types of debts including taxes, the general rule being that if the tax debt was assessed at least three years ago they can be included in a bankruptcy. If you have unfilled returns that will have balances these will not be dischargeable in a bankruptcy unless you wait until they are old enough.

To qualify for bankruptcy, you normally must have filed your last three (3) tax returns. That means if you have unfilled personal or business returns you should get those returns filed as part of preparing to file for bankruptcy.

Should I deal directly with the IRS instead of filing for Bankrutpcy?

You need to ask yourself who is coming after you the fastest and can you include all of your tax debt in a bankruptcy? It makes more sense to file for bankruptcy if you have other kinds of debt with higher balances than your IRS tax debt. If you are going to file for bankruptcy anyway, it usually makes sense to include your tax debts in the bankruptcy.

If you owe mostly tax debt, and want to preserve your credit, you might want to work with a tax professional to resolve your IRS tax debts. An Offer In Compromise, Hardship Status or Installment Agreement can help improve your credit or buy you time to deal with the debt itself.

Who should I talk to if considering hiring a Bankruptcy Attorney or a Tax Attorney?

I would talk to both. Each profession has their experience and they don’t cross over very often. A good Tax Professional should encourage you to explore all of your options before hiring you as a client if you are considering a bankruptcy. Good Bankruptcy attorneys should do the same.

In summary, get Informed. Get good advice before taking action. It is important to move quickly if the IRS is coming after as well but it should not take long to get consultations (usually free) with a Bankruptcy attorney and Tax attorney. The best ones work hand in hand with each other and refer clients back and forth so they can be fully informed and make the best decisions for their unique situation.

Statute of Limitations 

FILING PAST DUE TAX RETURNS

How many returns do I have to file?

When you call the IRS, talk to a tax preparer or even talk to a CPA – you can get bad information depending on who you are talking to.

BE WARY – There is a LOT of bad information out there about how many old returns do you need to file with the IRS. 10 years is the typical answer – and it is WRONG. Also, if a taxpayer didn’t have enough income to have a filing requirement, they don’t need to file older years either.

The IRS regulation that addresses this question is: IRM 5.1.11.3.3.1 (01-15-2010)

Documentation of Compliance

Confirm all tax periods are filed for the preceding six-year period and secure a copy of the taxpayer’s return if necessary. Check compliance through the current tax period including periods previously closed as surveyed or shelved. List all delinquent tax periods and determine the taxpayer’s compliance with other types of taxes appropriate for their personal or business activity.

In practice what this means is that the IRS can only request a taxpayer file the last six (6) years of tax returns to qualify for a Resolution (Hardship, Offer In Compromise or Installment Agreement).

For example: In 2023 the IRS can only demand the following tax years: 2017 – 2022. As soon as the new year starts, January 1, 2024, the IRS will only be able to ask for taxpayers to file 2018 – 2023 even though the deadline for 2023 will not be until April 15th (or October 15th with an extension)

True Story from a Guardian Tax Law Client

A taxpayer hadn’t filed his tax returns for 23 years. He prepared and filed them without getting good tax advice first. Once filed, he owed the taxes for all 23 years starting when he filed the returns, not going back to the original due dates.

How do I know if I have a Filing Requirement?

A taxpayer is supposed to file a tax return if they had taxable income of more than the standard deduction for the given year. As the standard deduction increases every year a taxpayer needs to compare their taxable income to how much the deduction was in a given year.

  • Example 1: John worked at a convenience store part time while he attended college in 2022.
    He earned $12,000.00 in 2022 as his only income. The standard deduction for 2022 is $12,950.00. John has no filing requirement as he didn’t have enough income for the year.
  • Example 2, Sue is a retiree. She worked part-time in 2022 making $6,000.00.
    She also received Social Security income of $10,000.00. Her total income is $16,000.00 she DOES have a filing requirement.

Practice Tip: You might not have a filing requirement but it might be advisable to file a return if the IRS/State might assume or think you had income.

Examples:

  • Gambling: If you gamble only the winnings are reported to the IRS, not the losses. You need to report the losses or the government will assume you just had winnings.
  • Investments: Traders in Bitcoin or other volatile investments might lose money, but again only the gains are reported to the IRS. You need to report the losses or the government will assume you just had gains.
  • Business Income: If you receive 1099s for your work, sell real estate or have income reported to the IRS they will assume that is your net profit. You could have a loss, or very little income after business expenses. You need to report the business losses or the government will assume you just had profit.

IF you have questions – call an experienced tax professional for some FREE ADVICE. It always pays to get some free advice before stepping on a tax landmine. Good companies or professionals will review your rights and options with you and educate you about the Process.

Here at Guardian Tax Law we give free advice all the time to help steer taxpayers in the right direction at least, and to help them find Peace of Mind.

Collection Statute Expiration Date or CSED

DOES MY TAX DEBT EVER GO AWAY?

IRS tax debt typically ‘expires’ 10 years after it was assessed. The date that the tax debt is supposed to expire is called a Collection Statute Expiration Date or CSED. When you call the IRS you can request to know the CSEDs for each tax year you owe taxes for. This gives you a rough idea of when tax debts will expire.

Once a tax debt expires the IRS legally cannot pursue the debt anymore and the balances for expired years drop off your tax account.

True Story from a Guardian Tax Law Client

I called the IRS to set up a payment plan for a client that owed $25,000.00. The IRS informed me he had about $10,000.00 in debt expiring in one week. The client didn’t have the money, but the IRS representative insisted he needed to pay the $10,000.00 before the debt expired. I told the IRS representative I would see what my client could do. I then called back in two weeks and set up a payment plan on the remaining $15,000.00 without any problem.

Practice Note: If you make payments toward expired debts the IRS will still take your money.

State Taxes:

Most State tax debts become ‘unenforceable’ after 20 years from the date of assessment. In most cases this can be extended out to 30 years but does not typically happen. California and New York are the biggest tax debt states and they both follow the 20-year rule.

In some States the debt doesn’t become ‘unenforceable’ for 30 years or it doesn’t ever become unenforceable. Each state is different so check with your local state.

When does the time start running for my tax debt to go away?

The time starts running when a tax debt is assessed – which can happen through a few ways.

  • When you file your tax return and it gets processed: This means if you are filing tax returns very late the clock starts ticking when the older returns are processed.
  • If you a tax year is Audited/Examined and you have a balance assessed to your Account.
  • If the Government files a tax return for you in a given year (only IRS, not most states).

As the clock only starts running when a tax debt is assessed as a balance to your account it often does not help to file tax returns later. It only helps if more than 6 years pass away and you do not have a filing requirement any more.

The biggest tax penalty is usually for ‘Failing to timely File’ a tax return.

Can time for my tax debt to go away be increased?

YES – there are few events that can happen that will extend out when tax debt expires or becomes unenforceable. These events happen when taxpayers do something that prevents the IRS/States from taking collection actions against them. Examples of collection actions are – Bank Levies, Wage Garnishments, Seizures of properties, and Filing of Tax Liens.

  1. Filing for Bankruptcy – puts a hold on the time for tax debt to expire or go away.
    Some tax debt can be discharged in bankruptcy but not all, especially if the tax debt was assessed more recently.
  2. Filing an Offer In Compromise – with the IRS a hold goes on a taxpayers account preventing collection actions. This also extends out when a tax debt will expire. Filing multiple Offers that are not successful can add a LOT of time to an expiration date.
  3. Appeals – When a taxpayer files for any kind of appeal with the IRS that stops collection actions but also extends out the expiration dates. Make sure when an appeal is filed it is for valid reasons and not just to buy time.

Practice Note: You cannot trust the expiration dates the IRS might give you until you are close to the expiration dates. The IRS now ‘recalculates’ the expiration dates and often puts them out 6-12 months. The IRS is NOT always correct on this and I have fought and won on this issue when the IRS incorrectly extended out the expiration dates.

It is very important to understand when your tax debt might expire or become unenforceable. Any good tax professional should review how this might affect your case and case strategy as part of their process. Talk to an experienced Tax Professional to get Peace of Mind.

Conclusion

In the world of personal finance, few burdens weigh as heavily as IRS tax debt. However, as we’ve explored in this blog post, there are avenues for relief and redemption. IRS debt forgiveness programs offer a glimmer of hope for those grappling with the daunting prospect of tax liabilities. Whether it’s through an Offer in Compromise (OIC), Innocent Spouse Relief, Currently Not Collectible (CNC) status, bankruptcy, or even the statute of limitations, there are paths toward financial freedom.

But remember, while these programs exist, they are not one-size-fits-all solutions. Your unique circumstances, financial situation, and tax history will shape the best approach for you. That’s why seeking professional guidance is often the wisest step you can take.

Book a free consultation with a Guardian Tax Professional today to get clear answers to your unique situation.

We hope this guide has been a valuable resource in demystifying IRS debt forgiveness.

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