Tax debt can be a burden on individuals for several reasons. If you owe taxes, you may be subject to penalties and interest charges, which can significantly increase the amount you owe. This can make it difficult to pay off the debt, especially if you are already struggling financially. According to the IRS, over 14 million taxpayers owed back taxes in 2021. However, there are various tax debt relief options available that can help you reduce or eliminate your tax debt.

The first step in getting tax debt relief is to understand the options available to you. The IRS offers several programs that can help you reduce or eliminate your tax debt.

Installment Agreements (Payment Plans)

An installment agreement, also known as a payment plan,  allows you to pay your tax debt over time. Tax debt installment agreements are commonly used by individuals, businesses, and self-employed taxpayers who are unable to pay their tax debt in full when it is due. With an installment agreement, you make monthly payments to the IRS until your tax debt is paid in full. The terms of the installment agreement may vary depending on the taxpayer’s financial situation and the amount of tax debt owed. In general, the taxpayer agrees to make monthly payments towards the tax debt, including any interest and penalties that may apply, until the debt is fully paid off.

One of the main benefits of tax debt installment agreements is that they provide taxpayers with a manageable way to pay off their tax debt without incurring additional penalties or interest for late payment. By entering into an installment agreement, taxpayers can avoid more severe enforcement actions by the tax authorities, such as wage garnishment, bank levies, or property liens, which can have a significant impact on their financial stability and credit rating.

Tax debt installment agreements are a useful tool for taxpayers who are unable to pay their tax debt in full and need a manageable way to resolve their tax debt. However, it’s essential to understand the terms and requirements of the installment agreement and explore other options that may be available depending on the taxpayer’s unique financial situation. Consulting with a tax professional or tax advisor can provide valuable guidance on the best approach to resolving tax debt.

Offer in Compromise

An Offer in Compromise (OIC) is a settlement agreement between the taxpayer and the IRS that allows the taxpayer to pay less than the full amount owed. To qualify for OIC, taxpayers must demonstrate to the tax authorities that they are unable to pay the full amount of their tax debt due to financial hardship and that it is unlikely that they will be able to pay the full amount in the future. The tax authorities consider various factors, such as the taxpayer’s income, expenses, assets, and overall financial situation, in evaluating an offer in compromise.

One of the main benefits of a tax debt offer in compromise is that it allows taxpayers to resolve their tax debt for a reduced amount, potentially saving them a significant amount of money. It also provides a way for taxpayers who are facing financial hardship to achieve a fresh start and become compliant with their tax obligations. Submitting an offer in compromise requires careful preparation and documentation. Taxpayers typically need to provide detailed financial information, including their income, expenses, and assets, along with supporting documentation. The IRS or relevant tax agency will review the offer and may request additional information or documentation during the evaluation process.

If the offer in compromise is accepted, taxpayers can settle their tax debt for an amount less than the full amount owed. The accepted amount may be paid in a lump sum or through a payment plan, depending on the taxpayer’s financial situation and the terms of the offer. It’s important to note that the acceptance of an offer in compromise is not guaranteed and is subject to the discretion of the tax authorities. It’s important to note that not all taxpayers may qualify for a tax debt offer in compromise. The process can be complex, and the criteria for acceptance can be stringent. Additionally, there may be fees associated with submitting an offer in compromise, and taxpayers must continue to meet their ongoing tax obligations, such as filing timely tax returns and making required tax payments, while their offer is being evaluated.

A tax debt offer in compromise can be a viable option for taxpayers who are unable to pay their tax debt in full and are facing financial hardship. However, it requires careful consideration, thorough preparation, and adherence to the requirements set forth by the tax authorities. Consulting with a tax professional or tax advisor can provide valuable guidance on whether an offer in compromise is a suitable option for a taxpayer’s unique financial situation.

Currently Not Collectible Status

If you are unable to pay your tax debt due to financial hardship, the IRS may grant you Currently Not Collectible (CNC) status, which is a temporary relief option offered for taxpayers who are facing financial hardship. When a taxpayer’s account is designated as CNC, the tax authorities temporarily suspend collection activities, such as wage garnishment, bank levies, or property liens, due to the taxpayer’s inability to pay their tax debt.

To be considered for tax debt CNC status, taxpayers must demonstrate to the tax authorities that they are experiencing financial hardship and do not have the means to pay their tax debt. Financial hardship can be due to various circumstances, such as a loss of income, serious illness or disability, or other extenuating financial circumstances that prevent taxpayers from meeting their tax obligations.

The process for obtaining tax debt CNC status typically involves providing financial information, such as income, expenses, and assets, to the tax authorities for evaluation. The tax authorities will review the taxpayer’s financial situation and determine whether the taxpayer qualifies for CNC status. If the taxpayer is approved for CNC status, the tax authorities will temporarily suspend collection activities, and the taxpayer will not be required to make payments toward their tax debt during the CNC period. CNC status typically lasts between 6 months to 2 years, depending on the financial situation of the taxpayer. 

It’s important to note that while tax debt CNC status provides temporary relief from collection activities, it does not eliminate the tax debt. The tax debt remains outstanding, and interest and penalties may continue to accrue during the CNC period. However, CNC status provides taxpayers with much-needed breathing room to improve their financial situation and potentially explore other options for resolving their tax debt, such as installment agreements, offer in compromise, or other debt resolution strategies. It’s also important to understand that tax authorities may periodically review the taxpayer’s financial situation to determine if the taxpayer’s financial condition has improved and whether the CNC status should be lifted. If the taxpayer’s financial situation improves, the tax authorities may resume collection activities or require the taxpayer to enter into an alternative payment arrangement.

Penalty Abatement

Penalties are additional charges that may be imposed on taxpayers for various reasons, such as failing to file a tax return on time, failing to pay taxes by the due date, or inaccurately reporting tax information. Penalty abatement provides taxpayers with an opportunity to request relief from these penalties under certain circumstances. It allows taxpayers to request a waiver or reduction of certain penalties that have been assessed on their tax debt. 

Taxpayers may be eligible for tax debt penalty abatement if they can demonstrate to the tax authorities that they have a valid reason for their failure to comply with their tax obligations, and that their failure was due to reasonable cause rather than willful neglect. Some common valid reasons for penalty abatement may include:

1. Reasonable cause: Taxpayers may qualify for penalty abatement if they can show that their failure to comply with tax obligations was due to circumstances beyond their control, such as a serious illness, natural disaster, or unavoidable absence.

2. First-time abatement (FTA): Taxpayers who have a good compliance history and have not incurred any penalties in the past may be eligible for FTA, which provides automatic penalty relief for a single tax period for certain penalties.

3. Administrative error: If the penalty was assessed due to an error made by the tax authorities, taxpayers may request penalty abatement based on administrative error.

4. Statutory exception: Some penalties may be waived if they do not apply to a taxpayer’s specific situation based on certain statutory exceptions.

To request tax debt penalty abatement, taxpayers typically need to submit a written request to the tax authorities, providing detailed information and documentation to support their claim for relief. The tax authorities will review the request and evaluate the taxpayer’s circumstances to determine whether penalty abatement is warranted.

It’s important to note that tax debt penalty abatement is not guaranteed, and the decision to grant penalty relief is at the discretion of the tax authorities. Taxpayers must provide sufficient evidence and meet the specific criteria set forth by the tax authorities to qualify for penalty abatement. If the request is approved, the taxpayer may receive a reduction or waiver of the penalties assessed on their tax debt.

Bankruptcy

 In certain situations, filing for bankruptcy may be an option to eliminate tax debt. Tax debts are generally not dischargeable in bankruptcy unless certain conditions are met. The bankruptcy code distinguishes between different types of tax debts, including income taxes, payroll taxes, and other types of taxes, and the requirements for discharging tax debts may vary depending on the type of tax and the circumstances of the debtor.

In general, income tax debts may be dischargeable in bankruptcy if they meet the following criteria:

1. The tax debt must be for income taxes only: Other types of taxes, such as payroll taxes or fraud penalties, are generally not dischargeable in bankruptcy.

2. The tax debt must be for a tax return that was due at least three years before filing for bankruptcy: This means that the tax return must have been due, including extensions, at least three years before the debtor filed for bankruptcy.

3. The tax debt must have been assessed by the tax authorities at least 240 days before filing for bankruptcy: This means that the tax authorities must have assessed the tax debt, and the 240-day period must have elapsed before the debtor filed for bankruptcy.

4. The tax debt must not be the result of tax fraud or willful tax evasion: If the debtor has willfully attempted to evade taxes or engaged in tax fraud, the tax debt will not be dischargeable in bankruptcy.

It’s important to note that even if a debtor meets these criteria, there may be other requirements and limitations that apply to discharging tax debts in bankruptcy. Additionally, bankruptcy may have other consequences, such as the liquidation of assets or the establishment of a repayment plan, depending on the type of bankruptcy filed (Chapter 7, Chapter 11, or Chapter 13) and the debtor’s specific financial situation.

Filing for bankruptcy is a complex legal process that requires careful consideration of the debtor’s financial situation and the specific rules and requirements of the bankruptcy code. It is recommended to seek the guidance of a qualified bankruptcy attorney or tax professional to navigate the process and understand the implications of filing for bankruptcy to discharge tax debts.

A Tax Attorney or Tax Professional Can Help

If you are struggling with tax debt and cannot afford to pay the debt in full or on time, a tax attorney or tax professional can help. Complete our tax debt review form for a free consultation.