Many taxpayers who owe back taxes look for a way to get their tax debt forgiven. That’s only natural, especially when there are so many people out there promising to make your tax debt disappear or reduce it to just pennies on the dollar. But the availability of tax debt forgiveness depends on a variety of factors and navigating the system can be quite complicated. Let’s dive in.
The correct path to seeking tax debt forgiveness begins with determining whether or not you agree with your tax assessment.
You Disagree with Your Tax Assessment
If you
disagree with your tax bill, your options will depend on why the tax was assessed—and rather than seeking tax debt forgiveness, you will be looking to communicate with the IRS to resolve the tax discrepancy. If, on the other hand, you agree with the amount on your IRS tax bill, your options will depend largely on the extent to which you are able to pay the balance due. Let’s discuss both of these scenarios.
If you failed to respond to an audit notice or neglected to file your tax return, you might disagree with the IRS’s tax assessment for the year in question. In both scenarios, the IRS will assess taxes based on information they’ve received from third parties such as employers, brokerage houses, etc. If your amount due stems from an audit, you can appeal the decision, but you must do so in a timely manner. If your tax assessment is the result of a tax return the IRS filed on your behalf, known as a
Substitute for Return (SFR), you can file your own tax return and include the information the IRS did not have, such as charitable contribution deductions or qualified medical expenses paid. Keep in mind that if you never file your own original tax return for a specific tax year, the
statute of limitations on assessments will never begin, which means that the IRS will have an unlimited amount of time to review the return and assess additional tax.
If you disagree with a tax assessment resulting from an audit or an SFR, you may be able to qualify for an
Audit Reconsideration. An Audit Reconsideration provides an opportunity to have the results of an audit reevaluated or to contest an SFR determination. In both situations, you must be able to provide new information that was not considered during the original audit or when the IRS prepared the SFR on your behalf. Examples of items that may reduce your tax assessment are previously unconsidered cost bases for investment and cryptocurrency transactions, business expenses for work performed as an independent contractor, and rental property expenses. The process for contesting an SFR also involves
preparing your own original, albeit delinquent, tax return.
You Agree with Your Tax Assessment
The path to tax debt forgiveness when you
agree that you owe the taxes assessed begins with an evaluation of your financial situation. If you have the ability to pay the debt, either through your income or selling assets, the chances are slim to none that you will be able to escape paying the tax due. If, on the other hand, paying your back taxes will put you at risk of not being able to meet your basic living expenses, the IRS might suspend collection on the debt and write it off after the collection period has expired. For those whose situations are somewhere in between, partial tax debt forgiveness may be possible.
If you cannot pay your taxes in full all at once, an
Installment Agreement might be a great option. If you owe $50,000 or less in back taxes, you will likely qualify for quick IRS approval of an installment agreement. If your tax debt is more than $50,000 and you want to pay in installments, you will need to negotiate the terms with an IRS collections staff member to determine an affordable monthly payment amount based on detailed information about your income and expenses. Note that this option is not forgiveness, per se, but it could lead to forgiveness at some point if your financial situation changes and you are no longer in a position to pay down your tax debt.
You might qualify for partial tax debt forgiveness if you are in a position to pay something toward your tax debt but not the full amount. In this situation, an
Offer in Compromise might be the right option for you. An Offer in Compromise enables you to settle your tax debt for less than what you owe. The IRS will evaluate your offer based on your income, assets, and expenses. It’s a lengthy and complicated process that could well be worth the effort if it results in a substantial reduction of your tax debt.
Finally, there are certain situations that may result in having your tax debt forgiven in full. The first situation is when paying the tax debt will cause you considerable hardship resulting in your inability to cover your basic living necessities. When this is the case, you can ask the IRS to assign your tax balance to
Currently Not Collectible status due to economic hardship. You may also be able to get your tax debt forgiven if your situation changes after you’ve entered into an Installment Agreement. (If you do have tax debt forgiven due to the expiration of the collections statute and you have had liens placed on your property, be sure to check with your local assessor’s office to make sure the liens have been removed.) As a last resort, resolution of your tax debt through bankruptcy may also be an option to consider, but you will want to consult with an attorney who specializes in this area to determine if it is the right solution for you.
Your ability to have your tax debt forgiven depends on your specific financial circumstances. Whether it’s an affordable payment plan, an offer to pay an amount that is less than what you owe, or tax debt forgiveness, a tax resolution specialist from
TaxAudit can help you evaluate your options and determine the best strategy for dealing with and resolving your tax debt.