If you owe back taxes to the IRS or anticipate falling behind on your taxes, the IRS offers a number of programs designed to provide taxpayers with relief from onerous tax obligations. If you are qualified, you may receive a waiver of penalties and interest, negotiate a payment plan, suspend IRS collection activity for a designated period, or settle with the IRS for less than the amount of your full tax debt.
Waivers of Penalties and Interest
The IRS may agree to waive penalties and interest if you can convince them that you had "reasonable cause" for failure to file or pay taxes on time. Lack of money, however, is never accepted as reasonable cause. You will have to show that you exercised ordinary care and prudence but were prevented from filing or paying on time due to reasons that were either beyond your control or under circumstances of hardship. Examples would include the occurrence of a natural disaster or the death of an immediate family member.
If your total unpaid IRS debt does not exceed $25,000, you may negotiate a payment plan with the IRS that will allow you to pay in installments. Although penalties and interest will not be waived (and continue to accumulate until you become current), the IRS will refrain from placing a tax lien against your property or initiating other collection activity as long as you keep up with payments.
If you can show the IRS that you are under financial hardship, the IRS may agree to suspend collection activity for up to two years without you having to pay any taxes during this time, although interest and penalties will continue to accumulate. This program is known as Status 53 and it is often granted to small businesses when the suspension of collection activity is necessary for the business to generate revenue with which to pay the tax.
Offers in Compromise
An offer in compromise is an offer to pay the IRS less than what they say you owe them in full settlement of your tax debt. It will only be granted after the IRS investigates your finances and concludes that you will never be able to pay the full amount of your tax debt even by installment, that extreme hardship would result from failure to accept partial payment (you are supporting a chronically ill child with expensive medical bills, for example), or that there is legitimate doubt as to the accuracy of the IRS tax assessment..