Dealing with unpaid back taxes can quickly become an overwhelming burden. Tax debt grows each year due to accumulating interest and penalties if left unaddressed. Fortunately, you may qualify for tax debt forgiveness and settle your tax debt for less than the full amount owed.
The IRS and tax code provide certain forms of tax debt relief for taxpayers struggling with their tax burdens. Depending on your circumstances, you may be able to take advantage of tax debt settlement, cancellation, or expiration opportunities.
What is Tax Debt Forgiveness?
Tax debt forgiveness involves reducing or eliminating tax debt through IRS programs and provisions in the tax code. It provides relief if you owe more in past due taxes than you can feasibly pay back. Forgiveness options enable negotiating a discounted settlement or even legal cancellation of tax debt under certain conditions.
Common Types of Tax Debt Forgiveness
Some of the most common ways taxpayers can seek forgiveness on taxes owed include:
Offer in Compromise (OIC):
An offer in compromise allows you to settle your tax debt with the IRS for less than the total amount owed. To qualify, you must have a legitimate inability to pay the full debt, doubt the assessed tax amount is accurate, or situations where paying in full would create excessive hardship. The IRS considers your unique set of facts and circumstances when evaluating eligibility. If accepted, an OIC permanently settles your tax debt.
Innocent Spouse Relief:
Taxpayers whose spouses failed to report income or claimed improper deductions without their knowledge may seek innocent spouse relief. If granted, the “innocent” spouse is relieved of tax liability assigned to them from their partner’s errors. To qualify, taxpayers must prove they had no knowledge or reason to know about their spouse’s tax reporting mistakes.
While not all tax debt can be discharged, some outstanding taxes can be forgiven through bankruptcy. Chapter 7 bankruptcy allows tax debts from three years prior to be eliminated, while Chapter 13 bankruptcy permits a repayment plan discharging taxes from two years prior. The bankruptcy court handles the administration and discharge of eligible tax debts.
Cancellation of Debt:
If tax debt is canceled by creditors or through foreclosure, the canceled debt is treated as taxable income. However, taxpayers can exclude canceled debt from income if they were insolvent at the time of cancellation, meaning liabilities exceeded assets. The insolvency exclusion enables tax debt forgiveness without incurring an additional tax burden.
Statute of Limitations Expiration:
After a certain period, the IRS legally can no longer collect tax debt. This timeframe is known as the statute of limitations, generally 10 years from the date taxes were assessed. If the statutes expire on your tax debt, it ceases to be legally collectible by the IRS. Time limits can be extended in certain cases, so it’s important to verify dates.
Meeting the Criteria for Tax Debt Forgiveness
To qualify for tax debt relief under these programs, taxpayers must prove:
– They cannot afford to fully repay tax debts when factoring income, assets, expenses, and ability to borrow.
– Outstanding tax debts are inaccurate or unsubstantiated.
– They were unaware of and not complicit in a spouse’s tax reporting errors.
– They filed the appropriate bankruptcy petition and meet proceedings requirements.
– They were insolvent when cancellation of debt income was accrued.
– The statute of limitations on collecting the tax debt has expired.
Consulting with a tax professional can help determine which forgiveness programs fit your situation and make sure eligibility requirements are met. They can also assist with navigating the application process to give your request the greatest chance of approval.
Obtaining Tax Debt Relief
Having tax debt forgiven or settled for less provides a fresh start and clean slate for taxpayers weighed down by unmanageable tax burdens. Evaluating your options under IRS tax debt forgiveness provisions can help identify the most effective solutions. Working strategically to meet eligibility criteria allows taxpayers to finally resolve tax debt issues and move forward.