Still have tax debts and wonder if you qualify for debt forgiveness programs? Learn everything you need to know about this IRS initiative here.
In this article:
What You Need to Know About Tax Debt Forgiveness
The IRS Is Here to Help
The Internal Revenue Service (IRS) makes debt forgiveness possible for cooperative and eligible taxpayers.
The IRS waives existing federal tax levies and liens through its debt forgiveness programs. This waiver can either be temporary or permanent.
Levy vs Lien: A levy is a lawful seizure of property while a lien is a claim against a property. Both seek to satisfy an outstanding tax debt.
Are Underemployed/Unemployed Individuals Eligible for Debt Forgiveness?
Yes, they are. Individuals currently in-between work, or looking for a better-paying job, may apply for a Currently Not Collectible (CNC) status.
This life jacket ensures applicants that the IRS will cease any and all collection efforts upon CNC approval. This period of tax relief allows people a shot to improve their financial situation, without the added pressure from outstanding tax debt.
However, it is important to note that the CNC status does not exempt anyone from paying what they owe the government. It only ceases property seizure, as well as bank and wage levies, temporarily.
To apply for debt forgiveness via CNC status, individuals and businesses will need to accomplish Forms 433A and 433B, respectively.
Is There Any Possibility of Lowering Outstanding Tax Debt?
Yes, there is. The Offer in Compromise program of the IRS makes this possible.
This tax debt forgiveness program allows taxpayers to pay lesser than the actual amount of their recorded debt. This program was most recently updated in 1992.
The IRS’s Offer in Compromise has provided tax relief to numerous individuals and businesses from taxes, interests, and penalties that might have been financially unmanageable otherwise. This program has three sub-categories:
- Offer Based Upon Doubt as to Collectibility – This program allows taxpayers to pay what they are financially capable of paying, instead of what they actually owe. Financial capability is based on the taxpayer’s reported source of income.
- Offer Based Upon Doubt as to Liability – This program allows taxpayers to contest existing IRS records. If the IRS finds out that inaccurate or bogus computations of outstanding tax debt have been made, the agency will adjust their records based on a taxpayer’s claim. This option safeguards taxpayers from rogue IRS agents.
- Effective Tax Administration Offer – This program allows taxpayers the privilege of tax deductions if paying in full will compromise their financial future. This option requires careful calculations of a taxpayer’s needed living allowance versus their regular income.
RELATED: Tax Relief for Deserving Americans | Do you Qualify?
Does Debt Forgiveness Apply to Spouses of Delinquent Taxpayers?
Yes, it does. The Innocent Spouse program makes this possible.
It exempts the better half of delinquent taxpayers from a spouse’s incurred tax responsibility.
In order to qualify for this program, applicants must submit supporting documents that can establish non-culpability. Otherwise, married couples who have opted for joint tax filing share conjugal tax debt.
Joint filing of taxes is not mandatory for married couples.
However, most married couples prefer joint filing of taxes. This is due to the additional tax relief it affords them.
These tax reliefs include lower tax rates and higher deductions. The downside is that when one half of the couple falls short of their tax responsibility, the other half will be just as legally liable.
What Are My Debt Forgiveness Options in Dire Financial Situations?
One’s financial undertakings ought to be handled with care. Prudent financial management is an integral part of financial literacy.
But sometimes things simply get out of hand no matter how conscientious we try to be about our finances. For taxpayers in dire financial situations, and with outstanding tax debt, there are two debt forgiveness options that might be considered.
Wage-Earners Repayment Plan
The first option is filing for the Wage-Earners Repayment Plan. This program allows taxpayers to negotiate a specific payment scheme with the IRS.
This payment scheme will be based on the applicant’s financial ability, specifically their fixed monthly income.
In the past, the Wage-Earners Repayment Plan was exclusively offered to regular-wage earners. Now it allows the eligibility of self-employed workers as well as unincorporated businesses.
Repayment schedule under the Wage-Earners Repayment Plan normally extends for between 3 and 5 years. Under this program, the IRS waives any outstanding amount after a 60-month duration if the taxpayer meets the agency’s set criteria.
Chapter 7 Bankruptcy
The second option is filing for bankruptcy (Chapter 7). By filing for bankruptcy, individuals and businesses receive relief from outstanding financial obligations and a fresh financial start.
This relief may extend to money owed to private creditors and tax responsibilities. This means automatic exemption from levies and liens imposed by the IRS.
The IRS grants these allowances to taxpayers who have successfully and properly filed for bankruptcy. Those paying mortgage, child support, and alimony remain legally-bound to their financial obligations despite filing for bankruptcy.
There are downsides to this option, however. They are as follows:
- Credit Score – Bankruptcy filing negatively reflects on an individual’s credit score. While credit score can be improved over time, past bankruptcy status appears on credit reports forever.
- Bankruptcy Publication – It is legally mandated for bankruptcy records to be made available to the public. This means that anyone can access bankruptcy filings, which include sensitive personal details.
- Loss of Property – Filing for bankruptcy could mean the loss of real estate property that is currently attached to a mortgage plan.
These two debt forgiveness options both have their pros and cons. This is why expert advice is crucial before taxpayers should pursue any of these aforementioned financial decisions.
Taxpayers may want to consider consulting with a professional financial adviser regarding this matter.
Conversations about finances, and specifically tax talk, tend to be rather stressful. Usually, the three-letter abbreviation, IRS, conjures no less than dread even among the most responsible taxpayers.
This should not be the case since as we mentioned earlier, the IRS is your friend and is here to help you.
If you have tax stories you wish to share, or questions you want to raise, please don’t hesitate to sound off in our comments section below.
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