8 Surprising Facts About Tax Debt Forgiveness That Will Help You
Tax debt is scary. It’s one thing to owe the IRS money, but it’s another to find yourself unable to pay it. The IRS itself is a frightening organization, full of stories of ruined lives and a path of destruction it carves through individuals and organizations who can’t pay their debts.
The truth is, the IRS just wants the money you owe them. If it were to go around repossessing cars, foreclosing on homes, and kneecapping debtors, it wouldn’t get paid. What you’re actually thinking of there is the mafia.
As such, the worst thing you can do when you have tax debt is to ignore it. When you ignore it, the IRS adds penalties on top of penalties and can take you to court for a judgment to get liens, levies, and other consequences applied. They might garnish your wages, they might take your tax refunds, and they’ll certainly charge you interest. There are a lot of consequences to ignoring your tax debt.
Luckily, the IRS, as we said, just wants to get paid. Good faith efforts and a constant dialogue with their representatives go a long way towards helping your situation and minimizing consequences. What’s more, the IRS offers a tax debt forgiveness program.
What is Tax Debt Forgiveness?
Unlike other forgiveness programs, tax debt forgiveness is not an elimination of your debt. It’s a process that looks at certain factors, like your current financial situation, and determines how much you can reasonably pay towards your tax debt. For example, if you racked up a large tax bill running a business and that business failed, leaving you with significantly less income, you may not be able to pay the full amount of taxes in anything like a reasonable time.
The IRS will look at your situation and make a judgment. This judgment determines how much of your tax debt you can reasonably be expected to pay, and will set up a payment plan to help you pay that amount over time. Once that amount is paid, the remaining balance is discharged. Like we said; the IRS wants money, and some portion of your debt is better than none of it.
There are a bunch of possibly surprising facts about tax debt forgiveness that can help you out of a tough situation. What are they? Read on!
#1: Enrolling in a Plan Halts Interest Penalties
The IRS gets increasingly irate when people ignore their notices. The longer you go on ignoring them, the more sternly-worded they will be, until they are forced to send out a collector. Moreover, the longer you ignore your tax debt, the more the penalties stack up. Interest is a big one; the longer you go without paying, the more you’ll have to pay when you get around to it.
When you apply for a tax debt forgiveness program, the IRS considers it a good faith attempt to pay off what you owe. They will help facilitate this by cutting off any interest applied to the principal you owe them. Your tax debt won’t continue to grow as you pay it.
Additionally, as long as you’re accepted into a tax debt forgiveness program and you continue to make your payments as you can, the IRS will cease other collection efforts. They won’t try to garnish your wages, take your tax return, or put a lien on your assets.
#2: There’s More Than One Program!
Tax debt forgiveness is not a single program. In fact, there are more!
- Offer in Compromise. The Offer in Compromise (OIC) Program is a method where you can offer a compromise to the IRS. You say “hey, I can’t pay this full amount, but I can pay $XXX. Will this suffice?” The IRS will analyze your situation, including your income and assets, and will either accept or reject the offer. If accepted, you can then pay the lower amount to settle your debt.
- Fresh Start Initiative. The Fresh Start Initiative is an IRS program that has been expanded in recent years to accept more people. It gives you several options to pay, including breaking up your total tax burden into a payment plan stretched out over six years. Other options exist as well, including abatement due to reasonable cause.
- Currently Not Collectable. The Currently Not Collectable status is a temporary flag the IRS can put on your account. If you can prove that your financial situation is bad enough to warrant it, they can put a hold on collections and penalties while you use your assets to get back on your feet. Your debt will eventually come due, but ideally, it will be once you have fixed your finances and are better able to pay.
Applying to these programs requires different paths, but they’re all accessible to the average citizen, not just the wealthy. It’s always well worth investigating your options.
#3: It’s Easy to Qualify
Well; it’s not easy to qualify, but it’s easier than many people might think. Common impressions are that tax loopholes and debt forgiveness are only available to the wealthy, but the truth is, the majority of these programs are used by people with low incomes or who are suffering hardship. Sudden medical issues and expenses, the failure of a business, and problems related to the Great Recession have all led to tax burdens that people can’t pay. The IRS knows this and genuinely wants to help as much as it can, while still bringing in some of what you owe.
In order to apply for one of the tax debt forgiveness programs, you need to meet certain criteria. These criteria vary depending on the program you’re applying for, and from year to year, but they generally include:
- You must be up to date on filing returns. Even if those returns add to your tax debt, you need to file them.
- You must be up to date on paying state taxes. IRS tax debt forgiveness is a federal program, and they want you to be square with the state before they consider your case.
- You must not be currently in bankruptcy proceedings. While bankruptcy can help your case in private debt situations, it doesn’t touch federal debt. Still, the IRS needs an accurate picture of your financial situation to approve you for a program, and they can’t get that until your bankruptcy is settled.
- You can’t owe TOO much. Thresholds vary, but if your tax burden exceeds $100,000, you won’t be eligible for these programs.
While your tax situation may be complicated, as long as you’re not outside certain extremes, you should be able to apply for a program with the IRS. We highly recommend talking to an expert to prepare your financial statements to be as accurate as possible when you apply.
#4: You May Be Accepted Automatically
One of the biggest concerns many people have with tax debt and filing for tax debt forgiveness is the time involved. The IRS is notorious for having a backlog due to its own underfunding and understaffing, and as such, it can take a long time for them to process tax documents, tax returns, and reconsideration requests. Though the current commissioner claims the backlog will be settled by this summer, you never know what may happen between now and then.
What happens when you file a request? The IRS will put it in their queue to process. When they begin to process your request, they will analyze the information you provide them about your financial situation. They may ask for more information or clarification of your situation, or they may not. The trouble is the timing; this process can take months, or even a year or more! During that time, your situation can change, potentially dramatically.
In order to prevent situations where an individual has tax debt hanging over them for years while the IRS ignores their situation, there is an auto-accept period. If you submit an offer in compromise and it takes the IRS more than two years to process it, it will be accepted automatically. You will, at the absolute latest, have your response within two years of the date of submission.
#5: The IRS Considers Cost of Living
When you apply for a fresh start program, the IRS will take a picture of your financial situation. They want to know your debts, your income, your expenses, your assets, your investments, and anything else that may be relevant to your financial situation.
One such set of expenses is variable, and there have been people who attempt to game the system: living expenses. Some people have, in the past, attempted to inflate their lifestyle through the purchase of high-end products and excesses that aren’t necessary, to try to convince the IRS they have lower income than they do. The truth is, the IRS sees through this and has a document called the “allowable cost of living.” This document is a rundown of what a reasonable cost of living (minus rent) is for the average person, and is the maximum that can be claimed as living costs when filing for tax debt forgiveness.
One nice thing is that in recent years, the IRS has increased this number. They recognize that costs of living have gone up, and increase the number to keep up. The 2020 numbers can be found here, for example.
#6: Your Spouse May Not Be Liable
In some situations, a married couple may keep their finances separate enough or hidden from one another, such that one spouse ends up delinquent and suffering from tax debt, while the other has no idea. This isn’t just the stuff of TV dramas; it happens in real life. In fact, it happens so often, that there’s a specific exemption for the spouse in the IRS code.
That exemption is called, fittingly enough, the Innocent Spouse Relief clause. This relief is available to spouses even if they’re married and filing jointly, so long as one spouse is unaware of the inaccuracies or fraud that led to the tax debt initially. This situation can be tricky to prove, but if it’s genuinely the situation you find yourself in, it can be worthwhile to pursue it.
#7: You Can Appeal
Virtually every judgment the government makes for a program, whether it’s tax debt forgiveness, eligibility for unemployment assistance, or enrollment in a WIC program, can be appealed. If you file an offer in compromise, for example, the IRS will get back to you within two years with either a confirmation or a rejection.
If you are rejected for your request, you can file an appeal within 30 days of receipt of that rejection. This gives you the opportunity to present new evidence or changes in your circumstance that might make them reconsider. You may also be able to alter your offer to be more in line with their expectations, thus making it more likely to be accepted.
#8: Tax Laws Keep Changing!
While this might not seem like a good thing, it actually is. Over the last eight years, many changes have been made to the tax code. Many of those changes, particularly with regards to tax debt forgiveness, benefit you as a debtor. They usually expand windows, give more leeway, tweak financial limits to make programs more accessible, or otherwise optimize their programs for use. They remove barriers to entry, they increase rates of forgiveness, and they generally make it easier to get your tax debt forgiven.
This is not to say that you can simply ignore your tax debt and hope the changes to the law help you out more than the delay hurts you. The fact is, the best time to apply for tax debt forgiveness is right now. The longer you delay, the more penalties you may rack up, and the harder it will be to apply for forgiveness.
Should You Hire a Tax Representative?
All of the above should prove to you that it’s easier than ever and more valuable than ever to apply for a tax debt relief program as soon as you are able. However, we all know that navigating the IRS systems can be a huge pain, and there are hundreds of little numbers, documents, and receipts you need to keep track of to ensure that your accounting is accurate.
The solution is to work with a tax debt relief agency to help you prepare and file your paperwork with the IRS. These companies aren’t free, but they’re experienced, and they can help ensure that you’re accepted for the programs you apply for consideration. The choice is yours, of course, but when a mistake can be costly, it’s generally a good idea to seek help.