IRS Tax Debt Forgiveness Programs – What You Need To Know

People suffering from insurmountable tax debts look for a lifesaver, something that helps them to stay afloat and provide protection from the scary IRS collection actions. Believe it or not, that lifesaver can be in the form of IRS's best-kept secret – tax debt forgiveness. The following paragraphs will explain about the various debt forgiveness programs and situations that force the IRS to forgive your tax debts.

Under what circumstances, the IRS will forgive tax debts?

Statute of Limitations on Tax Collection: When you owe the IRS money, can you ever be off the hook from IRS collection actions? The answer is "yes" you can. There is a clock that will start to run on the IRS as soon as the tax is assessed. This is technically referred to as statute of limitations. Once the statute expires, your liability expires as well as the IRS's legal right to pursue collection efforts. So, if you can pay only X amount of dollars in the next ten years or so, what if the IRS is offered X+ $1 dollars by you to settle tax dues? Is that a good deal for the IRS? Can it work wonders for you? Yeah, it could very well be.

Reasonable Collection Potential (RCP): You may owe thousands or even millions of dollars to the IRS but what if you don't have any assets and/or income? How will you pay off the tax debt? This is where the IRS makes a determination of taxpayer's repaying potential, technically referred to as Reasonable Collection Potential (RCP). The RCP is how the IRS evaluates the taxpayer's ability to pay back their tax debts. If you are dead broke and your RCP is $0, paying just one dollar to the IRS can be a good deal to them. But settling for "pennies for the dollar" is not that likely to happen as most people aren't without any money. However, this is another instance where your tax debts could be forgiven by the IRS.

”Fresh Start”: Under certain circumstances, Chapter 7 bankruptcy can stop all the IRS collection efforts and also completely discharge back tax debts. In other words, you don't have to repay anything to the IRS, even if you have huge amount of back tax debts. Your debts forgiven and a fresh start granted – allowing you to start over a new life free of IRS liens and levies.

IRS Debt Forgiveness
So now, let's have a brief look into the specific IRS debt forgiveness programs.

Currently Non-Collectable Status
If your RCP is very low as your income or household cash flow matches the IRS "allowed expenses" and if you don't have any assets to sell, you may be able to qualify for Currently Not Collectible Status. Under this, the IRS will stop coming after you to collect back taxes and you will be protected from IRS levies, apart from your current withholding. In contrast to offer in compromise or bankruptcy that put collection statute on hold, the clock will continue to run while you are listed as non-collectible. If you have only few years left, you can run out the clock on the IRS. That means you pay the IRS nothing for your back taxes.

Partial Payment Agreement
If you do not qualify for CNC, the next best tax debt reduction plan is Partial Payment Installment Agreement. In this program, you pay a monthly amount to the IRS that you agreed upon. Similar to CNC, the collection clock continues to tick for PPIA also; you have to pay until the statute runs out. Once the statute of limitations expires, the IRS forfeits the right to collect the balance tax dues.

Doubt as to Collectibility – IRS Offer in Compromise
There are three different reasons the IRS can forgive your tax debts through the Offer in Compromise program, but the most common one is "the Doubt as to Collectability". It is based on what you afford to pay back to the IRS within the statute of limitations. At IRS Medic, we have a high success rate of reducing our client's tax debts by effectively using this program.

The IRS has realized that the chance of collecting back taxes more than what the taxpayer can afford to pay is very unlikely to happen. So they figured out it is in their best interest to forgive the tax debts either partially or fully depending on the taxpayers' ability to pay back. Remember, the IRS forgives tax debts not out of kindness towards the struggling taxpayers. The key is to offer hope and bring them back as productive, taxpaying citizens.

Tax Debt Relief: Know Your IRS Tax Settlement Options

The IRS offers numerous settlement options to taxpayers who are struggling to settle their tax owed. In this post, we will discuss about the advantages and disadvantages of some of the most common IRS tax settlement options.

1. Audit Reconsideration

Advantages: There are many situations in which a taxpayer may qualify for this option. Even in cases where the time limit to appeal is expired, the taxpayer can still request audit reconsideration.

Drawbacks: Your tax return should be audited originally and you should have valid reasons with evidence for not attending the audit. The process can take very long and sometimes, you may be required to appeal.

2. Full Payment Installment Agreement

Advantages: An easiest settlement plan to obtain, a full payment installment agreement can help avoid levies and garnishments. Liens will be withdrawn once full payment of taxes is made.

Drawbacks: A collection information statement is required, if the tax amount owed is over $25,000. One biggest drawback is that the interest and penalties will continue to accrue while you still owe. You may get limited time to repay and the IRS can also file a tax lien, when needed.

3. Partial Pay Installment Agreement (PPIA)

Advantages: Partial Payment Installment Agreement allows taxpayers to pay an affordable monthly payment, based on their financial situation. It is easier to obtain than an offer in compromise and you settle the debt for less than the total amount owed.

Drawbacks: It requires full financial disclosure and you will be even required to pay down your debt with any liquid assets. The IRS will reassess your financial situation every so often. Furthermore, the federal tax lien and its impact remain in place right until the expiration of the collection period.

4. Penalty Abatement

Advantages: Tax penalties that start out as a small amount can quickly spiral out of control, so in certain cases, a penalty abatement can stop the accrual, or even remove them completely.

Drawbacks: For many, penalty abatement isn't an appropriate solution because of their bad history of non-compliance. Even if you qualify, you still need to pay the base amount of owed tax in full.

5. IRS Offer in Compromise

Advantages: An offer in compromise allows the taxpayer to pay a reduced amount of the original tax liability. During the negotiation process, the IRS will suspend collection activity and when accepted, any tax liens on the taxpayer’s property will be lifted.

Drawbacks: This offer in compromise program is not for everyone and it can be difficult to get approved. The OIC will be kept in the public records for a year or more. The IRS has the right to intercept your tax refund and any payments you make. For a period of 5 years from the time the IRS accepts your offer, you must stay current with tax filings and payments.  If not, the IRS has the power to revoke the Offer.

6. Currently-Non-Collectible (CNC)

Advantages: This plan will prevent all "enforced collection" activity from the IRS (like levies and garnishments) and you don't have to pay any monthly payments till your financial condition improves.

Drawbacks: The drawback of “Non-collectible" status is that all outstanding liabilities will continue to accrue interest and penalties. This option will provide some temporary relief but does not solve all of your tax problems.

7. Bankruptcy

Advantages: Chapter 7 bankruptcy allows full discharge of older tax debts. The process is really quick; a taxpayer can receive a bankruptcy discharge within 4 months of filing.

Drawbacks: Trust fund taxes are not dischargeable in Chapter 7 bankruptcy. It will damage your credit rating drastically. Even in bankruptcy, the tax lien will not go away.

Don’t Make These Mistakes during Your Debt Settlement Negotiation with the IRS

People break out in cold sweat or start munching on antacid tablets as soon as they get that dreaded letter from the IRS. In fact, the IRS itself acknowledges that how intimidating the government agency can be. When individuals get a tax problem, many just want to escape from it or make the IRS get far away from them. Mistakes happen when they rush to get rid of their tax problems and this could cause much more harm to them in the long run.

This article will discuss about the five major IRS debt settlement mistakes taxpayers often make when they try to settle a debt with the Internal Revenue Service. 

Mistake No.1: Not being up-to-date on tax payments
Whenever you approach the IRS to have negotiation for reducing your tax debts, the first thing the IRS will ask is "Have you been in current compliance with tax?” This means that you have to pay your taxes on a regular basis through withholding or you should make estimated tax payments and it must be up to date. Also you must have filed your tax returns up to the present year. If you are not able to comply with the tax rule, doing discussion with the IRS can become an unnerving exercise. During these times, it is best to get assistance from a tax lawyer to do the talking for you.

Mistake No.2: Thinking the IRS has your best interest
IRS employees represent the government. They work with the best interest for the federal agency and not to you. Regardless how good they may seem, their interest is to get as much money from you within the shortest period of time. Believing a revenue official is out to assist you can be a huge mistake.

Mistake No.3: Missing important information while filling forms
Many people are filling out forms 433-a, 433-b and 433-f just like filling tax return. What they need to understand is that these documents work as a great persuasive tool in reducing their tax debts. So it is crucial to get these documents done correctly.

The IRS will carefully scrutinize your financial ability to pay and future earnings potential before they agree for partial payment. So present your report with true information and never forget to include all of your expenses in the IRS financial forms or better get your documents reviewed by a tax specialist. If you overlook significant things like vital expenses, you will end up agreeing to an unaffordable plan.

Mistake No.4: Not looking at other settlement alternatives
The IRS Offer in Compromise program is certainly one tax resolution method that is getting all the publicity in recent years. While this program might work for some, it certainly does not work for all. There are several other options, like the Partial Payment Installment Agreement, that can work best on certain cases to minimize back taxes. Chapter 7 bankruptcy is another great tool for eliminating tax debts.

Mistake No.5: Not using your legal right to appeal
Like everybody, IRS employees also make mistakes. So if you disagree with any IRS action, you have the legal right to ask the IRS appeals office to look at the case. But there are time-sensitive deadlines for filing appeals. So to avoid potential adverse outcomes, it's always best to have an experienced tax lawyer handle the entire appeal process for you, from the filing process to debt settlement negotiations.