The IRS (Internal Revenue Service) is responsible for collecting taxes owed by individuals and businesses in the United States. When taxes are not paid on time, penalties and interest accrue, resulting in a tax debt owed to the IRS. For many people, an unexpected tax bill can be overwhelming, especially if penalties and interest have caused it to balloon over time. This leads many to wonder – does the IRS ever forgive tax debts?
The short answer is yes, the IRS may forgive tax debts in certain circumstances. However, tax debt forgiveness is not easily obtained. The IRS has a duty to collect taxes owed, so they will only forgive debts if specific criteria are met. Understanding the different options for tax debt relief can help taxpayers navigate their situation.
IRS Debt Forgiveness Programs
The IRS offers a few formal programs for taxpayers to seek debt forgiveness or relief. Eligibility requirements and terms vary by program. The main IRS programs that provide tax debt forgiveness include:
Offer in Compromise
An Offer in Compromise allows a taxpayer to settle their tax debt for less than the full amount owed. To qualify, the taxpayer must prove they do not have the ability to fully pay the debt, or doing so would create significant financial hardship. Offers are granted based on ability to pay, income, expenses, and asset equity. Tax debt is typically settled for a one-time lump sum payment, or payment plan over 5 or fewer months. If accepted, the remaining tax debt is forgiven. However, strict terms apply – the taxpayer must comply with all tax filing and payment requirements for the next 5 years, or the debt may be reinstated.
Currently Not Collectible Status
Taxpayers who truly cannot afford to make any payments towards their tax debt at the present time may be eligible for Currently Not Collectible status. This puts a hold on IRS collection efforts and pauses accrual of penalties and interest. To qualify, the taxpayer must have little to no disposable income or assets available. This status does not discharge the underlying tax debt. The IRS can review the taxpayer’s assets and income annually to determine if collections should resume.
Innocent Spouse Relief
In some cases, one spouse may be relieved of liability for tax debt incurred during marriage. To qualify for Innocent Spouse Relief, the applying spouse must show they did not know about or benefit from the tax understatement. For example, if one spouse hid income or misrepresented something on a joint tax return, the other spouse may qualify to have related tax debts forgiven.
Penalty Abatement
Penalties for late filing or late payment are typically assessed automatically. The IRS may agree to remove these penalties if the taxpayer has a history of compliance and reasonable cause for the failure, such as serious illness or unusual circumstances. Interest charges cannot be abated, but removing penalties can still significantly reduce the tax debt owed.
Other Ways Tax Debts May Be Forgiven
Outside of formal IRS programs, tax debts may still be discharged in certain situations:
Bankruptcy
Filing Chapter 7 or Chapter 13 bankruptcy allows for certain tax debts to be discharged, generally those from at least 3 years ago. Recent tax debts and those associated with fraud cannot be discharged.
Statute of Limitations Expiration
After 10 years passes from the date taxes were assessed, the IRS can no longer pursue collection through liens or lawsuits. The debt expires and is essentially forgiven. However, it is still legally owed – the IRS can continue contacting the taxpayer requesting payment.
Death
Upon death, any unpaid federal tax debt is forgiven. However, tax liens may still attach to the deceased taxpayer’s estate. The deceased person’s debts do not transfer to heirs or beneficiaries.
Success Rates for Tax Debt Forgiveness
The IRS releases annual statistics on the acceptance rates for some of its settlement programs:
| Program | Cases Accepted |
|---|---|
| Offer in Compromise | 38% |
| Currently Not Collectible | 48% |
| Penalty Abatement | 44% |
As shown, even in the best case scenario, less than half of requests for tax debt forgiveness are approved. Standards are tight, because the IRS takes inability to pay very seriously before writing off tax obligations.
Forgiveness rates also vary depending on the taxpayer’s specific circumstances. For example, business taxpayers generally have a more difficult time qualifying for relief than individual taxpayers. Recent tax debts have lower odds of forgiveness than older ones. Taxpayers with compliant history fare better than those with past issues.
Should You Seek IRS Tax Debt Forgiveness?
Trying to establish inability to pay is a complicated process with the IRS. Simply asking for tax debt forgiveness without evidence does not typically yield results. However, working with a tax professional significantly improves the odds that an appropriate resolution can be found.
If you owe back taxes and do not realistically have the means to pay them, it is certainly worth exploring potential relief options. The worst that can happen is being told no. On the other hand, you could end up saving a substantial amount of money if the IRS determines you qualify for one of their settlement options.
Seeking professional assistance is recommended when pursuing tax debt forgiveness. Preparing an effective request involves navigating complex IRS rules and procedures. A tax expert can evaluate your situation, advise on which program to pursue, compile required financial documentation, estimate settlement terms, and negotiate with the IRS on your behalf. This expertise increases the likelihood of having at least a portion of tax debts forgiven.
Do not wait to address IRS tax debts. Penalties and interest accumulate rapidly. Most taxpayers find they simply cannot afford to pay the full inflated amounts after years of growing. Getting ahead of tax debts before they spiral out of control improves the probability of identifying a workable tax resolution.
Conclusion
The IRS may forgive unpaid tax debts, but only under specific circumstances. Their formal relief programs – such as Offer in Compromise, Currently Not Collectible status, Innocent Spouse Relief, and Penalty Abatement – have strict eligibility requirements based on inability to fully pay. Outside of these programs, tax debts may expire after 10 years or be discharged through bankruptcy. Overall, fewer than half of all requests for tax debt forgiveness are approved. Working with a tax professional provides the greatest chance of qualifying for IRS relief programs and removing a portion of tax debts. For taxpayers who truly cannot afford their past due tax bill, seeking IRS forgiveness is generally worth pursuing.