What is Tax Forgiveness?

Joe Valinho
Expert Contributor
Last Updated:
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Tax Forgiveness: How Can I Get My IRS Debt Forgiven?

What is the meaning of tax forgiveness? Can I get my back taxes forgiven?  How do I qualify for tax forgiveness? These are some of the common questions taxpayers ask us looking to resolve their back taxes.

Here we will answer all of these questions and more so that you can determine if you can get your IRS debt forgiven and what steps you can take.

What is Tax Forgiveness?

Under certain circumstances, the IRS reduces a part or entirety of back taxes that you owe. There are three conditions in which someone can achieve tax forgiveness. These are:

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  • You can get a reduction in back taxes if you cannot afford to pay your entire back taxes amount.
  • The statute of limitations for collection, which is usually 10 years, expires.
  • The IRS puts your case under a ‘Currently Not Collectible’ status if you can pay nothing of what you owe because of your adverse financial condition.

As you can see, your financial situation is of paramount importance. If the IRS discovers that paying the tax debt will force you into a financial crisis where you cannot pay for allowable living expenses, they cannot ask you to pay.

What is Tax Forgiveness?

How Do I Qualify for Tax Forgiveness?

When considering taxpayers for tax forgiveness, the IRS looks at the paying capacity of the taxpayer. To determine whether you can pay your back taxes and how much of it you can pay, the IRS will ask you for your financial and tax specifics. They will look at your bank accounts, wages, other income sources, house, cars, and more.

If you cannot pay your back taxes in full, you can apply for the IRS tax forgiveness program called an ‘Offer in Compromise.’ This tax debt resolution plan has various qualifying factors.

For instance, before you apply for an Offer in Compromise, you need to have filed all your tax returns that you are required to file. If you apply for an Offer in Compromise without filing all your returns, the IRS will reject your application and send back the setup fee but will keep the initial payment you sent and apply it to your back tax balance.

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Which IRS Plan Allows Tax Forgiveness?

The IRS offers a variety of tax debt resolution plans. An Offer in Compromise is a tax forgiveness plan that allows taxpayers in difficult financial circumstances to resolve their back taxes by paying less than what they owe. How much of the debt the IRS forgives depends upon the paying capacity of the taxpayer.

Along with an Offer in Compromise, taxpayers under financial constraints can also consider a Currently Not Collectible status. This is the status the IRS gives to tax debt cases where they cannot recover any amount in back taxes. When the IRS puts a case under Currently Not Collectible status, the agency waits for the taxpayer’s financial situation to recover so that they can recuperate the back taxes in full or in part.

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How Much Does the IRS Charge in Penalties and Interest on Back Taxes?

It sometimes happens that taxpayers do not know that the IRS charges penalties and interest on back taxes. This becomes a big problem because, after months and years of non-payment, the total back taxes amount grows substantially solely due to penalties and interest.

The IRS begins charging a failure-to-pay penalty at 0.5% of the tax amount owed after the expiry of the due date for payment. This penalty can reach up to 25%.

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Along with the failure-to-pay penalty, the IRS also charges a failure-to-file penalty if you did not file your return that you were required to file. The failure-to-pay penalty charged is 5% of the unpaid taxes. This penalty can reach up to 25%.

If you did not file your return and did not pay the taxes owed, then the combined penalty is 5%.

Though the failure-to-file penalty will max out after five months of non-filing and non-payment, the failure-to-pay penalty keeps on accruing until you pay your back taxes in full.

Along with penalties, the IRS also charges interest on back taxes. Interest is charged at the federal short-term rate plus 3%. It is charged on the total debt amount and compounds daily.

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Even if you owed a small amount in tax debt, this amount could balloon into a substantial sum if it remains unresolved for long due to penalties and interest.

What Does the IRS Do to Collect Back Taxes?

In tax debt cases, the IRS can begin collection actions at any time. It starts with mailed notices and can lead to the IRS seizing the taxpayer’s property, such as house, car, boat, etc. to satisfy back taxes. They can also take away all or a part of wages or freeze bank account(s) to recover back taxes.

If you received an IRS notice informing you that you owe back taxes, it is best to resolve it even if you cannot pay the taxes owed. The sending of the notice means that your owing of taxes has their attention. Suppose no response is received, and no satisfactory efforts are made to resolve the tax debt. In that case, the IRS can progress to aggressive collection actions such as a lien and a levy, which can upset your financial stability and adversely affect your credit report.

Until How Long Can the IRS Collect Back Taxes?

The IRS usually has a 10-year period to recover back taxes. If they are unable to recover back taxes till 10 years, they normally close the case. In rare cases, however, they may go beyond 10 years to collect back taxes.

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How Can I Get Help?

When you’re looking to get your back taxes forgiven, it is important to get help from a tax resolution service or a tax professional because the IRS wants to recover the most they can in back taxes.

Hiring a professional service can get you the most tax debt reduction possible, save you from paying more in penalties and interest, and make the resolution process quick and smooth. Since tax forgiveness is an unfamiliar path for most taxpayers, it is best to let an expert guide you.

 

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Joe Valinho
Expert Contributor
Last Updated: