Tax debt relief refers to a variety of programs and options that can help taxpayers reduce or even eliminate their outstanding tax debt. However, not everyone qualifies for tax debt relief. Listed below is a summary of the 4 different types of tax debt relief available and the criteria that taxpayers must meet to qualify for them.
Installment Agreement
One of the most common forms of tax debt relief is an installment agreement. An installment agreement is a payment plan that allows taxpayers to make monthly payments to the IRS to pay off their outstanding tax debt. With an installment agreement, the IRS will work with the taxpayer to determine a monthly payment amount that is affordable and that the taxpayer can maintain over a set period of time, usually up to 72 months. This can make it easier for taxpayers to pay off their tax debt without incurring additional penalties and interest charges.
To qualify for an installment agreement, taxpayers must:
- Owe $10,000 or less in taxes, penalties, and interest combined
- Be up to date on all tax filings
- Have a history of making timely payments in the past
- Not have any open bankruptcies
- Agree to fully pay the debt within 3 years
Offer In Compromise
Another option available to taxpayers is an offer in compromise (OIC). An OIC is an agreement between a taxpayer and the IRS in which the taxpayer agrees to pay less than the full amount of their outstanding tax debt. To qualify for an OIC, taxpayers must demonstrate that paying the full amount of the tax debt would create a financial hardship. The IRS will consider factors such as income, assets, expenses, and outstanding debts when determining whether the taxpayer is eligible for an OIC.
To qualify for an OIC, taxpayers must:
- Have a valid reason for not being able to pay the full amount of the tax debt (such as a hardship)
- Have filed all required tax returns
- Be in compliance with estimated taxes and filing requirements for at least five years prior to the submission of the application
- Have no open bankruptcy
Abatement
A third option is penalty abatement, which allows the reduction or elimination of penalties for taxpayers who meet certain criteria. To qualify for penalty abatement, taxpayers must generally be able to demonstrate that the penalties were caused by a reasonable cause (or circumstance beyond the taxpayers control) and that the taxpayer acted in a responsible manner.
Currently Not Collectible
The most severe solution for taxpayers is called Currently not Collectible (CNC) status. This status is for taxpayers who cannot pay their taxes, even after installment agreements or other payment plans. Taxpayers who are granted CNC status will not be required to make payments on their tax debt while they remain in this status. However, this status can last only a certain period of time and then the debt will go back to IRS’s enforcement action. To qualify for CNC status, taxpayers must prove that paying the tax debt would create an undue financial hardship.
The Fresh Start Initiative
The IRS also offers the Fresh Start Initiative, which was introduced in 2011 to help struggling taxpayers get back on track with their tax payments. The Fresh Start Initiative includes several measures designed to make it easier for taxpayers to pay their taxes, such as increasing the dollar thresholds for installment agreements and offers in compromise, expanding the criteria for hardship status and increasing the number of taxpayers who are eligible for automatic extension of the statute of limitations on collections.
It’s important to note that tax debt relief options and qualifications can change over time as the IRS updates their policies. Taxpayers who are considering applying for a tax debt relief program should be aware of the eligibility criteria and requirements for the program they are interested in and be prepared to provide the necessary documentation to support their application.
For taxpayers struggling with tax debt, it’s important to be proactive and explore the available options as soon as possible. The longer you wait, the more penalties and interest charges will accrue, making it more difficult to resolve the debt. Speaking with a tax professional can be very helpful to understand the best approach for a particular set of circumstances and navigate the process of applying for tax debt relief. A professional can help you determine which program you qualify for, help you prepare the necessary documentation and advocate on your behalf with the IRS.
Tax debt relief is a set of programs and options that can help taxpayers reduce or eliminate their outstanding tax debt. Taxpayers who are struggling to pay their taxes may be able to qualify for tax debt relief, but it’s important to be aware of the eligibility criteria and requirements for each program and to work with a tax professional or attorney to determine the best course of action for their individual situation. With the right approach and assistance, taxpayers can regain financial stability and resolve their outstanding tax debt.