The IRS offers partial, but potentially substantial, tax forgiveness to taxpayers with payment difficulties. Qualifying for the process requires gathering extensive financial information and filling up to three different forms, but it could save you thousands of dollars and help you avoid crippling tax liens.
An Overview of IRS Tax Relief Programs
The U.S. Internal Revenue Service has several programs addressing the problems of taxpayers unable to make timely tax payments. "IRS Topic 202: Tax Payment Options" gives an overview of available plans. Another IRS related overview of these plans also discusses avoiding tax liens and paying taxes in installments: "IRS Fresh Start Program Helps Taxpayers Who Owe the IRS" (see References for both IRS discussions).
Note that the IRS Fresh Start Program is not a self-contained program, but three different tax-relief programs, one of which is the Tax Forgiveness Program.
The IRS Tax Forgiveness Program
One IRS program directly addresses individual filers who apply for tax forgiveness without using a tax professional, the IRS Offer in Compromise. This plan gives you a way of settling your tax debt for less than the full amount.
Not every taxpayer with payment problems qualifies. The IRS won't accept an offer in compromise, for example, if the agency determines that you can pay the amount in full or in installments. When making this decision, the IRS looks at both your current assets and your projected future income. How far into the future the IRS looks depends on your circumstances and the amount of your tax debt.
There are a number of other different qualifying (and disqualifying) factors. Another important qualification requires you to have filed all your returns. For a detailed discussion of qualification requirements, see "Topic 204 - Offers In Compromise" in Resources, along with two different tools and forms specifically designed to help taxpayers through the qualifying and application process when they apply without the help of a tax professional. Summary explanations for each appear below.
IRS Tax Topic 204 Offers in Compromise
This booklet, included in the References section, covers
- Reasons why the IRS may accept your offer.
- Which forms to use.
- Application fees.
- Payment options.
- Offer terms.
- Difference between a rejected offer and one returned for more information.
- Implications of lien suspensions during the IRS consideration of your offer.
The IRS Pre-Qualifier Tool
The IRS Pre-Qualifier tool asks you to respond yes or no to a series of questions on such topics as your current tax status, current assets and projected future income. Once complete, the tool reports whether or not you qualify, along with any reasons for a disqualification. You can download the Pre-Qualifier Tool from this article's Resources section.
IRS Form 656 Booklet: Offer in Compromise
If you qualify, download the Form 656 Booklet: Offer in Compromise from the Resources section. First, read the background information. Some of it you already know if you've filled out the Pre-Qualifier Tool. It revisits the qualification criteria, and explains a few additional topics, such as what to do if you doubt that you're liable for the taxes assessed.
The next step is to fill out the included 656 form, which requires you to give detailed information about your financial situation: cash, investments, available credit, other assets, current income and debt. You'll also need to detail rent or mortgage information, and all your household expenses.
Another form appears in the 656 booklet, which you'll also need to complete: Form 433-A: Collection Information Statement for Wage Earners and Self-Employed Individuals. This repeats some of the same questions asked in the 656 Form and includes the section in which you determine the minimum offer the IRS may accept on the basis of the information you've provided. Importantly, it includes the box where you make the offer.
- You should consider contracting the taxpayer advocate for help in negotiating with the IRS. Contact details are on the IRS website.
- If you fail to secure an offer in compromise or other form of tax relief from the IRS, the IRS may place a lien against all your property (including your bank account and salary) and may eventually auction your property to satisfy your tax debt.
This article was written by Legal Beagle staff. If you have any questions, please reach out to us on our contact us page.