How to get tax debt relief through IRS debt forgiveness
Repaying delinquent taxes to the government can be a daunting task. But it isn't something you can stick your head in the sand about.
Surely you've heard it said, "Don't mess with the IRS." That's because the Internal Revenue Service (IRS) has the authority to tack on penalties and interest, garnish your wages, and legally seize your bank account by placing a levy on the debt.
Despite all that, there is relief available, including IRS debt forgiveness—if you know the steps to take.
If you are in debt to the IRS and tossing and turning all night, you are not alone. In fact, 20% of Americans who owe the government money are losing sleep over it according to a poll by U.S. News & World Report.
Regardless of whether those who owe the IRS simply failed to plan or were surprised and caught short by the tax bill, the end result is the same: they just cannot pay Uncle Sam what they owe in one lump sum.
As a result, about 25% of those surveyed will find themselves signing on the dotted line for an installment agreement to spread their payments out over months or even years.
This article will explore ways to obtain IRS debt forgiveness, as well as outline alternative debt relief options.
IRS tax debt relief program
The taxman is generally willing to work with debtors through an IRS tax debt relief program.
This doesn’t mean your tax bill will be erased entirely. Instead, it usually means that the IRS is willing to come to a settlement on the amount owed, including the possibility of an installment arrangement.
The IRS offers two types of installment plans: long term (monthly payments) and short term (180 days or less), depending on the amount owed and your filing status.
While an installment plan does not sound much like actual IRS debt forgiveness, it is a lifeline because it spares the debtor from having to pay the entire balance all at once. Even so, there's no way to avoid interest on that balance, or fees for issues like late payments.
Consumers whose tax bill exceeds $25,000 should be prepared to have monthly installment payments automatically withdrawn from a bank account. It's one step removed from having wages garnished.
Offer in compromise
Known as an offer in compromise, this IRS tax debt relief program lets a debtor settle their tax debt for a fraction of the total balance owed.
If someone finds that—besides not being able to pay their tax obligation—adhering to an installment agreement would create financial hardship, the IRS could grant them an offer in compromise.
First, the IRS will consider the individual's personal circumstances such as:
- Their ability to pay
- Their income
- Their expenses
- Any asset equity
To qualify, a debtor must submit a proposal to the IRS demonstrating that they meet the required criteria, such as filing all tax returns, not being in bankruptcy, to name a couple.
Unfortunately, there are no free lunches or total tax debt forgiveness. The IRS charges an offer in compromise submission fee of $186.
Ultimately, the tax agency has the final say on whether they will extend IRS debt forgiveness to applicants. In the proposal, applicants will either include a lump-sum payment of 20% of the compromise suggestion amount or an initial payment to go toward an installment agreement on the rest of the reduced amount.
Obtaining non-collectible status is a form of quasi IRS tax debt forgiveness. It is a label that the agency assigns to individuals who are simply unable to pay their taxes at all. As a result of having this status, the person won’t have to worry about the IRS trying to collect the debt.
But having non-collectible status doesn't mean that debtors receive total IRS debt forgiveness.
Instead, the tax agency will require regular updates on the individual’s income and expenses to gauge when the debtor will be in a better position to begin repaying the tax bill, plus penalties and interest.
Innocent spouse relief
Another way to receive IRS tax debt forgiveness is through innocent spouse relief. This is a type of IRS debt forgiveness program in which an innocent spouse is not required to pay for mistakes made by their partner.
When a couple files a joint return, they are generally both responsible for the outcome, including any balance owed. But when there are errors in a filing, such as unreported income, the “innocent spouse” may not be responsible for the mistakes of their partner, meaning they won’t have to pay the taxes, interest, and fees associated with the faulty filing.
To receive the innocent spouse relief, a taxpayer will have to request it through what’s known as Form 8857.
Alternative debt relief options
Individuals who don’t qualify for any IRS tax debt forgiveness programs could tackle their debt the old fashioned way, through alternative debt relief options.
While this involves taking on additional debt to pay off a tax bill, it could be a better option compared with the government’s drastic options, such as wage garnishment.
Lenders will generally give borrowers a great deal of latitude for how personal loan proceeds are used. Depending on the lender, borrowers should be able to use the loan funds to pay an IRS debt.
Personal loans are often unsecured, meaning the borrower doesn’t have to secure the loan with a personal asset, such as a vehicle. And personal loans often have a fixed interest rate which makes budgeting easier, plus funds can be in a borrower’s account within a day or two after approval.
401(K) plan loan
Another debt relief option is a 401(K) retirement plan. In this case, the individual essentially borrows money from their own retirement savings that they will have to repay later.
Account holders are permitted to borrow the lesser of either 50% of their 401(K) balance or $50,000 and will have five years to pay back the loan.
Desperate times call for desperate measures. That could mean relying on credit cards to pay an IRS bill. The best choice here would be an introductory zero-interest card that some card issuers offer, ideally with a high credit line.
Borrowers could take advantage of this perk and work to pay down the credit card balance before the introductory period runs out to minimize the amount of interest they pay.
Taxes are just one of those things in life that can't be avoided. The sooner anyone with a tax bill they can't pay can address the issue, the sooner they can discover whether there is a tax debt forgiveness program available to them.