When I realized just how bad my tax debt had gotten, I was floored. But as I began to educate myself about IRS policies, what I quickly learned is that I was not alone. I was surprised to find out that over a million taxpayers owe the IRS money. What surprised me even more was when I found out that the IRS is grossly understaffed and can’t keep up and collect all of these back taxes. This is actually good news for taxpayers as it translated into IRS tax debt forgiveness programs.
Don’t let the IRS intimidate you. There are ways to work together!
IRS tax debt forgiveness programs
Assuming you agree with the tax debt being assessed against you and have your unfiled tax returns completed, choosing which IRS tax debt forgiveness program best suits your needs is dependent on the three factors:
1) How much time does the the IRS have to collect?
Did you know, under most circumstances, that there is a clock running on the IRS’s ability to collect back taxes from you? There are a handful of additional aspects of the statute of limitations that govern the IRS’s ability to collect from you.
2) How much can the IRS reasonably expect to collect?
There is no difference in what you owe if you don’t have the money to cover your debts. In technical terms, the “blood from a stone” principle translates into IRS-speak as reasonable collection potential (RCP). If you are dead broke — meaning you have absolutely no assets — your RCP is $0. If you were to offer the IRS more than $0, then — despite how absurd it might sound — offering the IRS $1 might be a good deal for them.
3) Is it possible that bankruptcy might be a viable option?
Under certain circumstances, Chapter 7 bankruptcy can completely eliminate and wipe out personal tax debts. The IRS receives a very round figure ($0) for what could be hundreds of thousands, sometimes even millions, of dollars in accrued debts. That’s right, the IRS could walk away without collecting a single penny. So maybe the IRS would want to get something by sweetening the pot. Maybe they would be willing to take significantly less so that they don’t walk away with empty pockets.
Programs currently available
Now that you know the individual factors pressuring the IRS to enter into an agreement, it’s important to take a look at the specific IRS tax debt forgiveness programs currently available.
Currently Non-Collectable Status (CNC)
If your Reasonable Collection Potential is low and the assets you have aren’t worth anything or are inaccessible, you may be able to qualify for CNC. CNC means that you don’t have to make any payments to the IRS, aside from your current withholdings or estimated tax payments. CNC keeps the clock running, so if you are to remain in CNC for the duration of the statute of limitations, it’s quite possible that you won’t have to pay the IRS anything. Also, there are time requirements when it comes to bankruptcy, and oftentimes you must wait in order to discharge a debt. Learning more information about CNC can be a great way to help make a tax debt feel more manageable.
Partial Payment Installment Agreement (PPIA)
A PPIA is what you may qualify for if you have too much of an RCP for CNC (in other words, when your income and assets are too high to reasonably land you in non-collectable status). A partial payment installment agreement means that instead of not having to pay anything to the IRS, you will need to pay them something each month. Much like a mortgage or a car loan, you’re working at reducing your owed debt. Now this “something” won’t be enough to fully pay back the entire debt within the remaining collection period, but it has the IRS accepting a lesser amount and you meeting them partway.
When entered into a PPIA, the same benefits apply as CNC — you are running down the collections clock and may get closer to being able to file bankruptcy or have the collection period expire and eliminate your debt entirely. If you think a PPIA might be the best program for your situation, it’s well worth taking the time to learn more about what constitutes a partial payment installment agreement.
Offer in Compromise — Doubt as to collectability
There are a number of offer in compromise options available with the IRS, but they each tend to be a bit different. The one I want to focus on is a specific type of offer — doubt as to collectability — the most common type of IRS tax forgiveness program used to settle a tax debt for far less than what is owed.
Just like bankruptcy and payment plans, it’s important to know what you’re getting into. There are a number of tactics and tips for submitting an offer in compromise that the IRS will agree to, and it is definitely in your best interests to be aware of them.
Understanding your situation and what you can do to convince the IRS that you’re working with them is the first step to getting your life back in order.