Tax debt forgiveness occurs when the government determines that you do not have to pay a portion or all of your unpaid taxes. To have your debt forgiven, you typically must complete certain tax forms that propose a compromise, or an agreement with mutual concessions. If you offer to pay some of your debt within a reasonable period of time, the federal government may agree to excuse the remaining balance.
The Offer in Compromise (OIC) program lets you resolve tax debt for less than owed. This option is not available for everyone who needs back taxes help, but you may be able to participate if paying your total debt would cause extreme financial hardship.
Depending on your situation, the IRS may accept your proposed lesser amount. The IRS determines if you meet the criteria by reviewing the following factors:
- Household income
- Expenses, including your total debt, housing costs, and groceries
- Asset equity, such as cash, investments, and available credit
- Ability to pay
The government does not consider certain types of expenses, such as charity donations, college and private school tuition, and some unsecured debts. If you have a business, you need to provide financial details like future earning potential.
Before you submit an Offer in Compromise application, you’ll first need to file all required tax returns. In your OIC proposal, you can can offer one of two options:
- A one-time lump sum payment
- A payment schedule
There is a $205 application fee that you can pay by personal check, cashier’s check, or money order. You can also pay electronically through the Electronic Federal Tax Payment System (EFTPS).
In addition to the application fee, you’ll need to send an initial payment. The IRS applies this payment to your debt whether or not it accepts your offer.
The agreed-upon payment amount depends on whether your Offer in Compromise is for ongoing payments or a lump sum. Generally, your initial payment should equal the first month’s payment or 20% of the one-time payment.
You may need to provide one or more of the documents below to complete the OIC application:
- Form 656, Offer to Compromise
- Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Workers
- Form 433-B, Collection Information State for Businesses
An IRS representative may contact you after receiving your application. Sometimes, the government needs additional information or documentation to process the document. If you do not reply promptly, your application may be declined.
If approved, you’ll need to stick to your proposed payment plan and file all required federal tax returns for at least five years. You could default on the compromise if you do not file or make on-time payments, and you will owe the original amount plus accrued interest and penalties.
If you cannot afford installment payments, you might be considering bankruptcy. But you should compare filing for bankruptcy with another option that wipes away your debt.