Can Tax Debt Be Forgiven?

You may have seen other companies claiming they will help you apply for the IRS’ “Tax Forgiveness Program.” The truth is, there’s no such thing. But, there are a few ways that your tax might be entirely or partially written off (forgiven).

 

Can Tax Debt Be Forgiven

Bankruptcy

If you file for Chapter 7 bankruptcy protection, you may be able to have certain taxes discharged (forgiven), but you have to meet the following qualifications:

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  1.  The taxes you owe have to be income taxes. You can’t discharge employment tax debt or civil penalties. You also can’t discharge debt where fraud has been committed.
  2. The tax debt must be at least three years old. So, let’s say you have tax debt that would’ve been due April 15, 2015, you can’t file for bankruptcy on these taxes until April 15, 2016.
  3. You have to have filed your tax return showing the tax debt at least two years before filing for bankruptcy. Let’s say you never filed your 2014 tax return. The tax would’ve been due April 15, 2015. If you finally filed your return in October 2016, you can file for bankruptcy anytime after October 2018. In addition, you have to file your four previous years of returns before the bankruptcy filing regardless of whether you owe taxes or not.
  4. You must meet the “240-day rule.” This rule says the IRS must have assessed the taxes to you 240 days before you file for bankruptcy. This requirement is not as black and white as the others. If the IRS audits your return or you file an amended return, there is a chance additional tax will be assessed because of that audit or amendment. For example, you file your original return April 15, 2015. The IRS audits you and assesses additional tax debt on October 15, 2017. You would not be eligible to file bankruptcy until June 12, 2018 (240 days after October 15, 2017).

It’s almost important to know that during the bankruptcy, you must continue to file returns on time and pay your current tax debt on time.

Statute of Limitations

It is the rare circumstance where your tax debt is extinguished just because the statute of limitations runs out.

In general, the IRS has 10 years to collect the tax from you. If you fly under the radar long enough, the time could expire and your debt will be gone. But, in most cases, the IRS will take collection actions against you during this 10-year period.

Statute of Limitations with the IRS is 10 Years

There are also ways this 10-year statute of limitations can be extended, such as:

  1. You file for bankruptcy and your taxes are not entirely discharged. When you are in bankruptcy, the IRS cannot take collection action against you. Because of this, the statute of limitations stops running and the time it takes for your bankruptcy plus 6 months is added to that 10-year period.
  2. You sign a consent to extend the statute. This often happens as part of discussions with the IRS. For instance, you might sign this consent in order for you to gain time in an audit to gather information to defend your tax situation.
  3. You request innocent spouse relief. During the time you submit your request and while the IRS considers your request, the statute of limitations stops running. That time will be added to the 10 years.
  4. You request a Collection Due Process Hearing. During the IRS’ collection process, you will be given an opportunity to have a hearing where you can dispute certain collection actions that were taken against you. Again, the time it takes for that hearing and getting the decision from the IRS will be added to the statute of limitations.
  5. You request an Offer in Compromise. Again, while this Offer is being considered, the IRS cannot take collection action against you. So, if you are denied a compromise for your tax debt, the statute of limitations will continue and the time it took for the Offer to be considered will be added to the 10 years.

Offer in Compromise

While 100% of your tax debt cannot be extinguished with an Offer in Compromise, if your financial circumstances show that you can’t pay your taxes, you may be able to offer an amount lower than your tax debt to settle your entire bill. Whether you qualify depends greatly on your personal situation and how collectible the IRS thinks you are. The IRS has no obligation to accept an offer and 20% of the amount offered is due at filing.

Download our Tax Problems 101 eBook for a further explanation of how an Offer in Compromise work.

In summary, it is not often that IRS tax debt is forgiven, but there are circumstances where it may work for you. An assessment of your overall situation is very important to determine if you have a chance to have any of your taxes eliminated. If you’re curious about what that initial assessments looks like, check out our Financial Intake Questionnaire.

IRS Tax Problems Ebook