One of life’s worst nightmares is to owe IRS an amount of money that you can’t repay. But do you know you don’t have to go through those sleepless nights when you cannot afford your tax liability?
Even IRS understands that life happens and sometimes you may genuinely not be able to repay. You can only benefit from this program if you know it exists and how to make work. Unfortunately, this is IRS’ best kept secret and most people set themselves back a great deal by attempting to pay tax debt they cannot even afford.
There are several programs that allow you to qualify for forgiveness for part or all of your liability. It is important that you have this information so that you do not suffer unnecessarily or fall prey to unscrupulous organizations.
How do I Qualify for Tax Forgiveness?
When negotiating with IRS, a number of issues come to play and determine whether you will get a waiver, a write-off or nothing at all. These factors include current financial status (employed or unemployed), source of tax liability, ability to repay and ability to argue out your case professionally.
Offer in Compromise
Under Offer in Compromise program, IRS Debt Forgiveness Program allows you to pay less than you owe. The settlement of the tax liability is based on what you can afford to pay. Take for example you owe $40,000 and you are only able to pay $4,000, in this case you will be allowed to pay 10 cents on the dollar. This is why the OIC is also known as “Cents on the Dollar.” This compromise was revised in 1992. It is perhaps the broadest program under debt forgiveness.
This offer is beneficial especially for people who have gone into bankruptcy, have lost a job temporarily, overcharged or suffered a huge loss and are looking to get back on track without having IRS debt on their back. It has enabled many taxpayers that owed billions of dollars to clear their taxes, interests and penalties that they were unable to pay.
- Fresh Start
Fresh Start is what we have discussed above – an offer that is based on your ability to pay. It is known as ‘offer based upon doubt as to collectability.’ Here you settle what you can pay, instead of what you owe. Then IRS reduces the amount to be paid in lump sum or fixed monthly installments.
- Offer based upon doubt as to liability.
The second program under OIC involves challenging the amount charged to you as actual debt and instead paying what you actually owe. Consider for example, during tax audit some people are charged more than they owe. This can put you into a huge tax liability especially when penalties are added to them. This compromise is known as an offer based upon doubt as to liability.
- Effective tax administration offer
The third compromise allows you to settle a lesser liability if full settlement of the liability would put you in a financial hardship in the future. This compromise is called an effective tax administration offer. It is very beneficial in debt cases where the owed has enough equity in his house to pay the tax amount, but if the full payment is done would take up all your incomes and assets and leave you unable to take care of future living expenses.
The Life Jacket
If you have a tax debt and you are unemployed or underemployed making it impossible for you to pay the tax, you can apply to what is referred to as “uncollectible status.” Once you have obtained uncollectible status IRS initiates a process of freezing the collection account.
The agency therefore cannot go ahead with the process of enforcing collection on that account. This freezing allows you time to recoup financially without having to worry about a piling tax debt.
This is not a permanent solution to your tax problems. However, it helps significantly by preventing wage levies, bank levies or property seizures. To be granted uncollectible status, file a financial statement on Form 433A for individuals, and Form 433B for companies.
The financial statement needs to prove to IRS that all the revenue you earn is for meeting necessities or basic living expenses for your household. Uncollectible status will help you stay afloat to such a point when you are able to pay the debt or request for forgiveness under another program.
Wage-Earners Repayment Plan
As hard as it is to believe, income taxes can be discharged in bankruptcy. I know many professionals have told you income taxes are not dischargeable in bankruptcy but stay here and learn how you can get a relief.
To your surprise, this right has been in existence since 1966. However, it is only in 1989 when it was put in the open for the public. As a result, IRS rewrote its 904, which clarifies issues touching on ability to discharge taxes in bankruptcy.
Chapter 13 Bankruptcy allows taxpayers to enter into an agreement to repay taxes according to his capability or to make once-a-month payments. When certain rules are satisfied, whatever will not have been paid within 60 months is usually cleared or discharged.
Since the IRS revised its OIC procedures, many of these bankruptcies have been avoided. However, it is very important that you have a clear understanding of your rights to discharge as included in Chapter 13.
Usually, you need to show the IRS that you understand the ability to discharge your taxes for them to consider giving your offer a serious consideration. Negotiate in a way that you will be showing IRS there is more benefit in taking your offer than pushing you into bankruptcy.
Currently not Collectible
It is also possible to walk scot free without paying a dime. If in actual sense and truthfully, you are not able to settle your tax debt, think about applying to be considered currently not Collectible, CNC. However, to qualify for this program there must be proof that paying any amount towards your tax liability would put you into an immediate financial hardship.
Please note that the CNC status is temporary. IRS will revisit your situation later to reevaluate your ability to pay. There is however a few cases when your situation remains unchanged for long enough, it becomes possible to outlive the tax debt without paying a cent.