What Is Tax Forgiveness?

Jill Bridges
Expert Contributor
Last Updated:
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  • Tax forgiveness means that the IRS has agreed to an arrangement to help an individual get out of tax debt.
  • Some forms of tax forgiveness allow taxpayers to pay off their debt in installments, while others either lower the debt or clear it completely if payment is not possible.
  • The families of military members who have been killed in combat may be forgiven for the service member’s outstanding tax debt.

Many people find themselves in debt to the IRS and owing back taxes on income. In consideration for those unable to pay back taxes, and knowing that they couldn’t possibly recover all those debts, the IRS developed a tax forgiveness program that includes several programs to suit individual needs. From payment arrangements to debt settlement, you may be eligible for one of the many IRS debt forgiveness programs that can help you lower your financial burden and get your IRS debt paid off faster so that you can begin moving forward.

If you have incurred substantial tax debt and don’t know how to pay back what you owe, one of the IRS debt forgiveness programs could help you solve your tax debt problem and give you a fresh start.

Paying Off IRS Debt

Before you can tackle your unpaid tax debt, you need to stay on track with your current taxes.

Always file your tax return. Regardless of whether you’re able to pay your IRS debt at this time, filing your return by the deadline helps you avoid interest and penalties that add to your current debt. The penalty for failing to file is quite steep, usually coming in around 10 times higher than the penalty for failing to pay.

The penalty for failure to file is roughly 5 percent of the unpaid taxes for each month or a portion of the month that your tax return is filed late. This penalty percentage is cumulative as well, but it can’t exceed 25 percent of your unpaid tax debt. The penalty for paying late is only 0.5 percent for each month of unpaid taxes. The minimum late filing penalty is $135, or 100 percent of your unpaid taxes, whichever is lower.

What Is Tax Forgiveness?

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IRS Debt Forgiveness

Many types of IRS debt forgiveness programs exist, including the following:

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Currently Not Collectible Status

Although this status is difficult to obtain, the IRS may consider your tax debt to be Currently Not Collectible. In other words, your debt repayment will be placed on hold due to extenuating circumstances that prohibit you from paying your tax liability.

If your debt is declared currently not collectible, all IRS collections will stop. While your personal property and assets can’t be levied, this declaration also puts a hold on the time period in which the IRS can legally collect from you. The Statute of Limitations on tax collection is 10 years, during which time your debt would continue to accrue interest and penalties.

Installment Plan

If you’re unable to repay your tax debt in total at the current time, the IRS may give you an installment agreement. These installment agreements allow you to make monthly installment payments that continue until your tax debt is completely repaid, which is usually set within a 72-month period.

If you pay off your debt fully, you can use the installment agreements to lower or eliminate interest and penalties. To be eligible for an installment agreement, you have to owe less than $50,000 in total income tax, interest, and penalties, along with filing all necessary tax returns. If you aren’t eligible for an online payment arrangement, you may still be offered an installment plan through IRS Form 9465 or IRS Form 433-F.

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In many cases, installment agreements require a fee, which is typically around $120, although you can reduce the fees in several ways. For example, direct debit, which is the easiest and most convenient way to keep up with payments, typically costs less, especially when combined with an online payment agreement.

Installment agreements for small businesses are slightly different than installment agreements for individuals. To qualify for an installment agreement for a small business, your business can’t owe more than $25,000 in back payroll taxes, and you must have filed all your business’s necessary tax returns. These agreements don’t require financial verification, but you need to have current employees to be considered.

If you have a tax refund during your installment agreement, the refund will automatically go toward your payments. You won’t have any tax refunds until your tax debt is paid off, and you must still file all your required tax returns on time and pay any taxes you may currently owe.

Getting approved for an installment agreement isn’t easy, however. The IRS takes your total income, necessary living expenses, and other factors into consideration, but the installment agreement terms are still quite extensive.

The IRS may reject an installment agreement for the following reasons:

  • Your collection information on the statement is false, which may lead the IRS to believe that you’re not being truthful about income or assets to avoid having to pay your total debt.
  • Your living expenses are deemed excessive. These excess expenses can include high credit card payments and large purchases that indicate you have more money than you claim.
  • You’ve defaulted on previous payment plans, and you’ve lost credibility in keeping up with your new installment agreement.

Your installment agreement can also be revoked for the following reasons:

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  • You’ve defaulted on payments. In this case, you’ll usually receive a statement providing you with 30 to 60 days to correct overdue payments.
  • You’ve failed to file and pay your current tax returns, which will cause the IRS to automatically revoke your agreement.
  • You’ve given the IRS incomplete or inaccurate information during negotiation that you know to be false, an act which has additional legal consequences.

Offer in Compromise

If you are unable to pay your tax debt, the IRS may consider an Offer in Compromise to settle your tax debt. This solution allows you to settle your debt for less than what you owe, with the settlement determined by your current ability to pay.

The IRS will consider an offer in compromise if the following conditions exist:

Doubt as to Collectability

If the IRS doesn’t believe you’ll ever be able to pay your outstanding balance, it may consider an offer in compromise. This process includes a thorough examination of your income and assets, which will help the IRS determine whether it can pursue collections or an offer in compromise.

Doubt as to Liability

If you have reason to believe the tax debt you have is incorrect and can prove it, the IRS may adjust your total debt to the correct amount.

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Effective Tax Administration

If you can prove that your current financial circumstances prevent you from paying your debt in full, but you’re not arguing that the debt is accurate, the IRS may accept an offer in compromise.

With an offer in compromise, you may have the option to pay the debt in full or pay what you owe through several payments over time. These payment options include the following:

  • Lump Sum Payments: If you prefer lump sum payments, you need to pay the compromise amount in five payments.
  • Short-Term Periodic Payments: If you prefer short-term periodic payments, you can pay the full amount within 24 months.
  • Deferred Periodic Payments: If you prefer deferred periodic payments, then you’ll pay the first payment with the offer in compromise and make payments periodically during the remaining statutory period.

Military Tax Forgiveness

Following the death of a service member, tax forgiveness may be an option to relieve the tax burden on the surviving spouse. This tax burden may be forgiven or refunded if the service member dies in the following circumstances:

  • The service member was on active duty in a combat zone.
  • The individual died from injuries sustained in a combat zone.
  • The person died from injury as a result of a terrorist or military action.
  • The forgiven tax years are according to the circumstances of the injury or death:
  • For combat zone deaths, the IRS forgives the taxes for the tax year in which the death occurred, as well as any tax years that end on or after starting active duty in the combat zone. All other owed taxes from prior years are forgiven as well.
  • For deaths that occur not inside a combat zone, but still in support of the military, the taxes for the tax year in which the death occurred are forgiven. Any unpaid taxes from prior years are forgiven as well.
  • For deaths related to terrorist or combat action, the taxes for the tax year that the injury occurred are forgiven, even if the death occurs in a different year. The prior tax year is also forgiven. For example, a service member who died in 2018 from an injury that occurred in a military action or terrorist attack in 2017 could be eligible for tax forgiveness as early as 2016.

For joint filing, the deceased service member’s portion of the tax liability is eligible for forgiveness or refund only. If you intend to submit a claim for tax forgiveness, you’ll have to figure out the percentage of the joint tax liability that would apply if the deceased service member had filed his or her own return.

Tax forgiveness is the responsibility of the taxpayer, not the IRS. If you want to submit a survivor’s claim, you’ll need to follow these steps:

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  • For a tax return that hasn’t been filed yet, file Form 1040 with the service member’s W-2.
  • For a tax return that has been filed, a separate Form 1040X for each year of desired tax forgiveness will also need to be filed.

The claim may be identified on a total tax line on either of these forms by writing the following:

  • Iraqi Freedom Killed in Action (KIA)
  • Enduring Freedom Killed in Action (KIA)
  • Kosovo Operation Killed in Action (KIA)
  • Desert Storm Killed in Action (KIA)
  • Former Yugoslavia Killed in Action (KIA)

If the death occurred as a result of a terrorist attack, KITA should be written on the return and on the total tax line. You’ll also need:

  • The deceased service member’s tax liability
  • Form 1310, the “Statement of Person Claiming Refund Due a Deceased Taxpayer”
  • A death certificate from the Department of Defense
  • The tax years forgiven vary based on the circumstances of the death, however, and you’ll want to consult a tax professional to explore your options.

Should I Hire a Tax Professional?

While it’s possible to set up an IRS debt forgiveness program on your own, understanding all the specifics of tax debt can be difficult. Without professional experience, you may not be aware of the details of IRS forgiveness or debt services, or you may not be able to approach the situation correctly to get a tax balance reduced or removed. With the offers in compromise, installment arrangements, and other settlement options, it can get confusing, and you may end up rejected for tax debt relief programs that would work well for your situation.

When you choose to work with tax professionals, however, you have the advantage of working with experts who have experience negotiating with the IRS and that understand the eligibility requirements for different relief programs. These professionals also have positive records of getting IRS debt relief passed for clients to help them reduce their unpaid balances with strategies that are appropriate for their situations. Depending on the situation, the outcomes could be anything from removing an entire balance with a well-developed case to reducing the overall balance with the right program. IRS debt is unlike other debt, and it may be worth both the financial and time investment to work with a professional and get the best option for your needs.

Contact Solvable

Having tax debt isn’t the end of the world, since the IRS offers several programs to help you repay your tax debt. Unfortunately, navigating these programs on your own and determining the best option for your needs can be difficult, which is why it’s always a good idea to consult with a tax professional and gain valuable insight into the strategy that works best for you.

If you’re interested in IRS debt forgiveness programs, you can have a professional help you review your options and decide on the best program for your situation. At Solvable, we specialize in helping people relieve themselves of tax debt by putting them in contact with tax professionals and providing education on tax debt forgiveness. Contact us today to learn more.


Jill Bridges
Expert Contributor
Last Updated: