Falling behind on taxes: it happens, and can happen to anyone. Tax debt can often be overwhelming, hurting your ability to get a loan, get a job, or have any financial security.

If you owe money to the Internal Revenue Service, you have options. In certain situations, the IRS may forgive part of the tax debt that you owe. Generally, if you owe more in taxes than you can reasonably pay, you can have a substantial amount forgiven.

For people with a substantial hardship, the IRS may approve an offer in compromise, which enables you to pay a fraction of the tax debt that you owe—sometimes removing it entirely. As a tax attorney can explain, there are strict eligibility requirements for anyone seeking an offer in compromise. Read on to see if this may be an option worth exploring.

How Much Tax Debt Do I Owe?

If you owe any amount of money to the IRS, it may be possible to have part of that debt forgiven. The first step is to determine exactly how much you owe for every year at issue, assuming you do not already know. The best way to do that is by contacting the IRS directly, either through your online taxpayer account, by calling the IRS at 1-800-829-1040, or by requesting an account transcript. Among these, checking your account online is the most likely to get you the information that you need.

The IRS may have already started a collection action against you, including sending a letter or notice that you owe, and “graciously” informing you that you can pay by check or card. They may do this in a number of ways, including:

• Filing a tax lien against your property;

• Placing a tax levy on your personal property, bank account, or tax refund; and

• Garnishing your wages.

If you have received a notice that the IRS is starting a collection action against you, the first thing that you should do is consult with a tax lawyer. They can advise you of your options, including seeking tax debt forgiveness if appropriate.

How Can I Convince the IRS to Forgive My Tax Debt?

If you are able to pay some portion of your current IRS tax debt, you may be able to apply for an IRS offer in compromise, or IRS OIC. This program is a way for taxpayers to settle their outstanding federal tax debt. There are strict eligibility requirements for the IRS OIC.

The IRS will only accept an offer in compromise if there is (1) doubt as to the collectability of the debt; (2) doubt as to the taxpayer’s liability; or (3) for the purposes of effective tax administration. In other words, if the IRS believes that you 1) can’t pay; 2) don’t actually owe taxes; or 3) the taxes create a substantial economic hardship, you could have some forgiveness. Most taxpayers who are eligible for an IRS OIC qualify because there is some doubt as to the collectability of their tax debt—they simply cannot pay.

The decision to accept an IRS OIC is based on your reasonable collection potential, determined by the specific facts of you situation. This means that the IRS will settle your tax debt if the amount you offer meets or exceeds the reasonable collection potential, which is the amount of money that the IRS could reasonably expect to collect before they run out of time to collect on it. This determination is made by evaluating your ability to pay, which includes your future income potential (jobs), expenses (bills), and asset equity (homes and cars). 

There are other strict requirements for submitting an IRS OIC. You must have filed all of your federal tax returns and made all required estimated tax payments for the current year. For business owners, all required federal tax deposits for the current quarter must have been made in order to submit an IRS OIC.

IRS Relief: The IRS Fresh Start Program

Qualifying for an IRS OIC can be difficult—most will likely be rejected at first (though this can be challenged on appeal). Recently, the IRS expanded its Fresh Start program, which offers more flexible OIC terms to allow financially distressed taxpayers to become current on their back taxes.

Typically, the IRS will not accept an offer in compromise if it believes that a taxpayer can pay off their tax debt, either through a lump-sum payment or via a payment plan. The IRS would rather you pay something than potentially nothing. However, the IRS recognizes the economic reality of our times. People are struggling to pay their bills. To accommodate this, the IRS expanded its Fresh Start program to broaden the criteria under which a taxpayer may qualify for an IRS OIC. These changes focus on the financial analysis that the IRS uses to determine eligibility for an OIC.

Under the Fresh Start program:

• The IRS will analyze 1 to 2 years of future income, rather than 4 to 5 years of future income to determine reasonable collection potential. The specific time frame is determined by the proposed payment period:

  • For offers paid in 5 or fewer months, the IRS will look at 1 year of future income (instead of 4 years);

  • For offers paid in 6 to 24 months, the IRS will look at 2 years of future income (instead of 5 years).

• Taxpayers can make the minimum payments for federal student loans.

• The allowable living expense standards now include a broad range of expenses,

• Taxpayers may be able to pay their delinquent federal, state, and/or local taxes in monthly installments if they are unable to pay in full.

• The dollar threshold for installment agreements has doubled.

• Equity in income-producing assets will generally not be included in the analysis for ongoing businesses.

As a result, more taxpayers than ever before will be able to take advantage of IRS tax debt forgiveness.

If You Owe Money to the IRS, Bring a Tax Lawyer.

Paying your taxes in full and on time can be challenging. There are many reasons why a person might get behind on their taxes. If you owe money to the IRS, we can work with you to find a solution to the issue. Call us today at (202) 505-1741 or schedule an appointment here.