Let’s face it. No one likes paying taxes. Consequently, it comes as no surprise that one of the very first things that many individuals and businesses who have fallen behind with taxes ask is: How do I get my tax debt forgiven?
You might wonder whether it is even possible to get an IRS tax debt forgiven. It may come as a shock, but it actually is possible to effectively have an IRS tax debt forgiven. But before you get too excited, I must forewarn you that it is not an easy thing to do. On a brighter note, many tax debts that can’t be forgiven can be significantly reduced or even settled for pennies on the dollar. If you want to learn about the different ways to get an IRS tax debt forgiven, eliminated, reduced, or settled for a tiny fraction of the amount owed, keep reading because you’re at the right place.
My focus is going to be on how to go about getting forgiveness or reduction of tax liabilities that have been correctly assessed. Keep in mind that it may be possible for you to get an incorrect tax assessment corrected (e.g. by filing an amended tax return, by appealing the findings of an audit, etc.). However, that’s a topic for a different day.
1. Forgiveness Due to Expiration of Collection Statute of Limitations
The IRS generally has 10 years from the date a tax liability is assessed to collect the taxes due. The future date—10 years after the tax liability is assessed—is called the Collection Statute Expiration Date or “CSED” (“see-said”) in IRS speak. If the IRS fails to collect the taxes due by the CSED, it loses the right to collect those taxes from the taxpayer in question.
It is important to understand that there are a number of things that can suspend the CSED. In other words, while these things are taking place, the 10-year clock is not ticking. Some of the most common things that will suspend the CSED are:
The CSED is suspended while a taxpayer is in bankruptcy, and for six months thereafter.
A court action brought against the taxpayer for the collection of tax prior to the expiration of the CSED generally extends the period to collect until the tax liability or judgment against the taxpayer is satisfied or becomes unenforceable.
c. Collection Due Process:
The CSED is suspended from the date the IRS receives a timely filed request for a Collection Due Process Hearing to the date the taxpayer withdraws their request or the date that the determination from Appeals becomes final, including any court appeals.
d. Offer in Compromise:
The CSED is suspended while an Offer in Compromise is pending with the IRS, for 30 days following rejection of an Offer in Compromise, and if an appeal is requested within 30 days of rejection, during the period while the rejection is being considered by Appeals.
e. By Written Agreement:
Under certain circumstances, the taxpayer may agree to extend the CSED.
f. Installment Agreement:
The CSED is suspended while a Request for an Installment Agreement is pending, for 30 days following the rejection of such a request, and if an appeal is requested during that 30-day period, during the period while the rejection is being considered by Appeals. The CSED is also suspended during the 30 days after an Installment Agreement is terminated, and during the period while termination is being considered by Appeals.
g. Taxpayer Living Outside the U.S.:
The CSED is suspended while a taxpayer is living outside of the U.S. if the absence is for a continuous period of at least six months.
Although there are, in fact, businesses and individuals who do manage to have their tax liabilities “forgiven” due to the expiration of the Collection Statute of Limitations, such forgiveness is the exception and not the norm. If you have a bank account, real estate or income that is reported to the IRS, you can expect the IRS to at least make a valiant effort to try to collect from you long before the expiration of the CSED. Consequently, crossing your fingers and hoping that you make it ten years without the IRS giving you some serious, and likely painful, hassles is not a strategy that is likely to succeed—especially if there are a lot of years left before the CSED.
With that said, the “pray for the CSED to expire” strategy actually can be effective in cases where there are only a few years left before the CSED. My colleagues and I have had a number of clients who were well into the 10-year collection statute when they retained our services actually survive the 10-year period. Some of them walked away Scot-free from very large tax debts.
If you are in such a scenario, I strongly encourage you to get professional help. There is a fine line between securing information from the IRS that will help you safely survive the remainder of your 10-year period, and “poking” the proverbial sleeping bear. A good pro can guide you through this period while minimizing the chances of waking the bear.
2. Currently Not Collectible Status
Currently Not Collectible Status or “CNC” (also known internally within the IRS as Status 53) can be achieved by demonstrating to the IRS that you are unable to pay anything towards your tax debt while still meeting your necessary household (or business) expenses. If the IRS approves you for CNC, they will not take enforced collection action against you or your business while you remain in CNC status. You also will not be required to make any payments towards your tax debt while you are in CNC (though expect them to keep any tax refunds to which you might be entitled).
In order to qualify for CNC, you must demonstrate two things. First, you must prove that you do not have any assets that could be sold or borrowed against for the purpose of paying down or paying off your tax debt. Second, you must prove that your income is less than or equal to your allowable expenses. You will have to submit documentation that proves these two things, and you can expect the IRS to heavily scrutinize this documentation. A seasoned tax resolution attorney can significantly boost your chances of being approved for CNC.
If you remain in CNC until the Collection Statute of Limitations (“CSED”), the IRS loses its right to collect the unpaid balance. Thus, the debt is effectively forgiven. If you make it this far, give yourself a pat on the back and stand tall, because you are one of the very few who has made it to the CSED without paying. Congratulations!
HOWEVER, CNC is not necessarily permanent. Obviously, the IRS wants to collect whatever it can from you. Consequently, they will periodically require you to submit updated financial information to see if your financial condition has improved such that you become able to pay something towards your tax liability. They will typically require you to do this every 18 to 24 months or so. If they request updated financials and you fail to provide them, you can say goodbye to your CNC status.
My colleagues and I have seen many taxpayers remain in CNC status all the way through the CSED, so CNC does work as an effective mechanism for getting tax liabilities “forgiven” for some.
Many taxpayers who qualify for CNC are also excellent candidates for an Offer in Compromise (“OIC”), which I will discuss next. Unlike CNC, an OIC is a binding contract. In other words, once the IRS accepts an OIC, they will not continue to nag you periodically for updated financial information with an eye towards making you pay more. For this reason, I strongly recommend that you consult with a seasoned tax resolution attorney before choosing to pursue CNC. Depending upon your circumstances, an OIC might be a far superior option.
3. Offer in Compromise
An Offer in Compromise (“OIC”) is an agreement whereby the IRS agrees to settle your tax debt for less than the full amount owed—sometimes for a tiny fraction of the total amount. Consequently, an OIC can be a viable strategy to have some or nearly all your tax debt “forgiven.”
I won’t sugarcoat it. Getting an OIC approved is a daunting endeavor. In 2019, the IRS accepted less than a third of the OIC’s that were submitted. I surmise that one of the biggest reasons for this ultra-high rejection rate is that a lot of taxpayers try to negotiate an OIC without professional assistance. Either that or they hire a professional with little or no experience negotiating OIC’s (hint: very few accountants truly specialize in resolving back taxes—they mostly focus on preparing tax returns and counselling taxpayers on how to avoid winding up in collections).
There are many, many reasons why having an experienced tax resolution attorney assist you in negotiating an OIC is a very good idea. To name a few:
1. The IRS rejects OIC’s based on technicalities routinely. Experienced tax professionals know these technicalities inside and out. You probably know none of them.
2. Preparing and negotiating an OIC is a very time-consuming process. Do-it-yourselfers and inexperienced tax pros regularly submit OIC’s that have no chance of being accepted. It can take a year or more to go through the OIC process. If your OIC has no chance of acceptance, you’re back to square one. It’s actually worse than square one. You now have another year’s worth of penalties and interest. And you just extended your CSED by a year (or so). Yuck!
3. The financial analysis is complicated, and the IRS employees who review and approve OIC’s (Offer Specialists) almost always interpret any gray or unsubstantiated financial data in a way that favors the IRS, increases your settlement amount, or results in your OIC being rejected outright. An experienced tax relief attorney knows how to prepare your OIC in a way that will minimize such unfavorable interpretations, knows which findings to challenge, and knows how to successfully challenge those findings.
4. The way the OIC formula works is essentially that you will settle for the dollars you have that the IRS concludes you do not truly need. Thus, the fee you pay to a tax pro often consists of dollars that will wind up going to the IRS as part of your settlement. That money is out the window one way or another. You might as well use it to have a pro relieve the stress and hassle of negotiating the OIC yourself, while also securing a far better outcome than you would likely secure on your own.
5. An experienced tax resolution attorney knows when to appeal the IRS’s findings with regard to an OIC, and knows how to win the appeal. In my experience, I’ve only recommended an appeal to clients in this situation when I believe we have a good case. I’ve won way more than I’ve lost. The results have been acceptance of OIC’s that would have otherwise been rejected outright or reduction of the settlement amount by tens or even hundreds of thousands of dollars.
4. Penalty Abatement
This method of “forgiveness” isn’t as sexy as the ones I’ve already discussed because only the penalties (not the actual tax) get “forgiven.” However, every dollar counts, and I’ve had many clients who owed an exorbitant amount in penalties that I was able to get rid of. Between late filing penalties, late pay penalties, and late deposit penalties, they can add up very quickly. Getting rid of the penalties can change a seemingly insurmountable tax debt into something manageable, so this is definitely something to consider if you don’t qualify for a “sexier” strategy.
If you want to go down the rabbit hole for an in-depth discussion on abating penalties, take a gander at this article. The bottom line, though, for most successful penalty abatement cases is that you have to demonstrate what the IRS calls “reasonable cause.” That means convincing the IRS that you meet the legal criteria for reasonable cause.
The IRS does not like to abate penalties. If your case has been assigned to a Revenue Officer (a local tax collector in your area), don’t be surprised one bit if they tell you early on that they will not abate your penalties. Do not listen to them! I can’t tell you how many Revenue Officers I’ve worked with who told me point blank that they would not abate my client’s penalties. Then, after reviewing my thorough, compelling, and well substantiated case in favor of abatement, they abate them. If they don’t, I still have sometimes gotten the penalties abated on appeal.
To have the best chances of getting your penalties abated, you must prepare and present a strong and compelling written request, and you have to back up your claims with proof. Nearly every time I’ve reviewed a penalty abatement request prepared by a client (before retaining me) or prepared by a non-attorney tax professional, it has been nothing more than a regurgitation of anything and everything that happened to “poor me,” along with what effectively amounts to “please give me a break because I’m a good person and I won’t do this again.” They do not cite any law. They do not explain why the facts meet the criteria for reasonable cause. They do not apply the law to the facts. They make weak arguments or no arguments at all. Worse yet, many of the facts they include actually destroy their own case. It makes me want to scream!
If you have a lot of penalties and you’re serious about getting rid of them, do yourself a favor. Have an experienced tax relief attorney prepare, submit, and argue your case. There’s no guarantee you will win, but you will have a much better chance. An ethical tax attorney will also tell you when you don’t have a chance. This, too, is beneficial because you’ll avoid wasting time and having headaches putting together a case that has no chance of succeeding.
5. Partial Payment Installment Agreement
The IRS will approve what is called a Partial Payment Installment Agreement (or “PPIA”) when you demonstrate that the most you can afford to pay per month after meeting your necessary household expenses (or business expenses) is not enough to full pay your tax debt prior to the Collection Statute Expiration Date (CSED). In other words, your monthly payments pay off a portion of the debt, and what remains unpaid once you reach your CSED is then effectively forgiven.
This is similar to Currently Not Collectible Status in the sense that the IRS will periodically require you to submit updated financial information with an eye towards increasing your monthly payments if they can. Many taxpayers who make good candidates for a PPIA also make good candidates for an OIC, so it’s a very good idea to consult with a tax relief professional before choosing to pursue this method of tax resolution. The decision you make now can have far-reaching consequences for your financial future, and tens of thousands of dollars (or more) may be at stake.
Which Form of Tax Relief is Best for Me?
If you or your business owe more than $15,000 in tax, penalties, and interest, it is worthwhile and highly advisable to consult with at least one reputable tax relief professional to help evaluate your situation and assist you in choosing the strategy that best suits your needs. Being in collections with the IRS is no one’s idea of a good time, so it pays to pick your strategy right the first time, get the debt resolved as favorably as the law permits, and move on to better things in life.
Fortress Tax Relief has caring and knowledgeable professionals on staff who would be happy to review your tax scenario with you over the phone, answer any questions you might have, and recommend a solution tailored specifically to you or your business. There is no charge for a telephone consultation, so pick up the phone and give us a call!