IRS One-Time Forgiveness: What It Is, How It Works, & How to Qualify
The 2018 tax return season held many surprises for taxpayers under the new laws.
For many, that meant unexpectedly low refunds. For others, that meant owing - or owing more than anticipated - to the IRS.
When you’ve got seemingly insurmountable tax debt, it may be tempting to ignore it, hoping it will go away. This is especially true if you owe far more than you can ever hope to repay.
However, that can cause far more problems for you than just owing money, including seizure of portions of your paycheck or a big hit to your credit score.
For those who owe the IRS money but they aren’t sure how they’ll be able to pay, there is an option: One-time forgiveness.
What Is One-Time Forgiveness?
Because the IRS, like many other government agencies, is overwhelmed by work needing to be done with fewer people able to do it, they cannot reasonably pursue every person who owes back taxes. Therefore, they sometimes offer one-time forgiveness to certain taxpayers who are proactive about handling their tax debt.
There are three main conditions under which you may receive one-time forgiveness:
- Low Realistic Collection Factor
- Non-Collectible Status
- Chapter 7 bankruptcy
Low Realistic Collection Factor
To help the IRS lighten some of the load, they sometimes are willing to forgive the tax debts of some taxpayers.
In these cases, your debt with the IRS is considered to have a low Realistic Collection Factor, or RCP.
You may qualify under RCP if:
- You are low-income.
- You have no assets, such as bank accounts or real estate, that could be seized and liquidated to pay your debt.
- You have no way to make payments on the amount owed.
While having your account labeled does not technically wipe out your debt, it does mean the IRS typically won’t make any attempts to collect what you owe.
You also can have your account labeled in Non-Collectible Status, or NC. Much like RCP, it means the IRS won't hound you to pay what you owe, and that you don’t have the income or assets to pay your debt.
The idea behind the NC status is that you get 10 years to increase your income and assets, making you able to pay your debt.
Once your account has been in NC status for more than 10 years, the IRS cannot legally pursue you to repay the debt.
Again, while this does not mean your debt is completely forgiven, it does mean that you won’t receive letters from the IRS requesting payment.
Chapter 7 Bankruptcy
By law, the IRS cannot pursue collection of any debt owed if you’ve filed for Chapter 7 bankruptcy.
The law applies even while your bankruptcy case is pending, so the IRS cannot contact you or attempt to collect on your debt.
The danger of using Chapter 7 bankruptcy as a shelter for not having to pay the IRS is that tax debt is rarely fully forgiven by bankruptcy judges. This means you’ll have to pay your debt once your case has been finalized.
However, if the judge does decide that your debt must be forgiven, the IRS cannot come after you again for your debt.
Are There Other Options?
The problem with attempting to get your entire tax debt forgiven or not collected is that getting one of those determinations can be time-consuming, stressful, and difficult. Many people who attempt to have their tax debt completely forgiven end up having to pay in the end.
For people who don’t qualify for total forgiveness but who owe more than they can reasonably pay, there are options for settling with the IRS for less than they say you owe.
The IRS Fresh Start Initiative
Instead of being a full debt forgiveness program, the Fresh Start Initiative is a debt settlement program that allows you to discharge your back tax debt for a fraction of the amount you originally owed.
There are three main ways the Fresh Start Initiative can help you reduce the amount of debt you owe:
- Offer in Compromise: With an Offer in Compromise, you settle with the IRS to pay less than what you owe. This is granted for people with low incomes or who have other financial hardships that prevent them from paying the full amount owed.
- Partial Payment Installment Agreement: A Partial Payment Installment Agreement, or PPIA, is the most commonly used part of the Fresh Start Initiative. With this, you and the IRS agree to payment installments over a period of time, hopefully making the payments more manageable for your budget.
- Tax Lien Withdrawal: With this option, you must agree to pay off the entire amount you owe the IRS through a direct debit repayment. In choosing this option, you request in writing that the tax lien be withdrawn from your account, keeping the debt from being reported to credit agencies.
Choosing to pursue the Fresh Start Initiative offers taxpayers who owe money a variety of relief from typical penalties the IRS can impose, including:
- Tax liens
- Seizure of assets
- Wage garnishments
If you have come to an agreement with the IRS under the Fresh Start Initiative, either with an Offer in Compromise, a Tax Lien Withdrawal, or a Partial Payment Installment Agreement, you pay off your debt you can be saved from many of the negative impacts of your debt while making it more manageable.
Requirements for Offers in Compromise
Because an Offer in Compromise means the IRS dispatches a portion of your tax debt because you do not and will not have the means to pay it, the requirements for qualifying for this type of tax relief are more stringent.
To qualify for an Offer in Compromise, you must prove to the IRS that you:
- Cannot afford to pay the full amount within the next 10 years
- Would experience economic hardship by paying the full amount
Taxpayers who have legitimate, proveable doubts about the amount the IRS is asking them to pay also may be eligible for Offers in Compromise.
Changing Your Installment Agreement
The IRS does allow you to make changes to your installment agreement, such as changing your monthly payment amount, changing your payment due date, converting your agreement to a direct debit agreement, or reinstating your agreement after a default.
Making changes to your agreement will require you to pay a $10 additional fee.
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Is Seeking One-Time Tax Debt Forgiveness Worth It?
If you owe a large debt to the IRS and you aren’t sure how you’ll be able to pay that amount, then looking into one-time tax debt forgiveness through any of the means described in this article is beneficial.
Participating in a program that allows for full or partial waiver of your debt, or for more manageable monthly payments, takes the stress of a large tax bill off your shoulders. You are better able to manage your money and maintain your other financial responsibilities.
Additionally, debt forgiveness options such as the Fresh Start Initiative can protect you from the negative consequences of just not paying your debt.
If you’re enrolled in an official IRS program or are in the midst of bankruptcy proceedings, you cannot be charged penalties which show up on your credit score.
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