How to Qualify for Tax Debt Relief and Forgiveness
Finding relief from tax obligations is a goal for many Americans. It’s not always easy to cover your full tax liability when you’re hit with a large bill or at least to pay it within the required time frame. The IRS collected billions of dollars in 2022 off of unpaid assessments and on late or delinquent tax returns, so this issue is definitely a common one.
Fortunately, you can apply for different forms of relief from the IRS when you’re having trouble making your payments. The important thing to remember is that you should try to negotiate with the IRS before doing anything else so you can stay in good standing. One common option for tax relief is one-time IRS forgiveness.
Before assuming this forgiveness is the best solution, it’s important to understand what it really means for your tax debt options and how it works. Is there really a one-time tax forgiveness program? Is this the only type of tax relief available when you’re unable to pay what you owe? This guide walks through everything you need to know.
What is IRS one-time forgiveness?
The phrase “one-time forgiveness” has now become commonplace when talking about tax debt and the IRS. However, the official IRS term for this relief program is first-time penalty abatement.
The appeal of getting “forgiveness” from the IRS has no doubt driven the popularity of the one-time forgiveness terminology in radio and TV ads and online forums. Big companies have also often used it as a marketing hook. No one likes to deal with taxes or tax debt, and this phrase embodies a simple solution that many people can understand and take advantage of.
Learning more about the IRS’s first-time penalty abatement program and requirements for applying can help you determine if you’re eligible for this common form of tax relief.
Qualifying for first-time penalty abatement
The IRS outlines all the specifics for how you qualify for tax relief and how to apply when you need help. First, you will only be granted first-time penalty abatement if you have a “history of good tax compliance,” according to the IRS. But what does this really mean?
Good tax compliance means you have previously been consistent with your tax obligations, including:
- You have filed the same type of tax return, when required, for the last three tax years.
- You did not get any penalties during those past three years, or if you did, they were removed for a reason other than first-time abatement.
- You do not have any failure-to-deposit penalty waiver codes from the last three years.
- You do not have a failure-to-deposit penalty for Electronic Federal Tax Payment System (EFTPS) avoidance.
You will also not be able to qualify for first-time abatement if your return includes an event-based filing requirement, the daily delinquency penalty, or information reporting that is reliant on a separate filing.
Additionally, not all IRS penalties and fines are eligible for abatement. The IRS says this form of relief only applies to:
- Failure-to-file penalties for tax returns, partnership returns, and S corporation returns
- Failure-to-pay penalties, when the tax owed is late, or the tax owed was not shown on your tax return and is late
- Failure-to-deposit penalties, when the tax owed wasn’t deposited in the right amount in the required time frame or manner
The IRS will consider granting taxpayers this type of relief no matter what the penalty amount is, and you may be able to get relief for multiple types of penalties during one tax period. If you’re not sure whether you meet the eligibility requirements, talk to a tax expert for further guidance.
How to apply for first-time penalty abatement
You can apply for one-time tax forgiveness with the IRS even if the full tax you owe hasn’t been paid yet. Note, however, that your penalty balance will continue to increase until you pay the amount you owe in full.
Here’s how the process works: When you are hit with an IRS penalty, you’ll receive a notice in the mail that outlines your obligations and the applicable penalties. Follow all instructions on this notice carefully when submitting an abatement request. You may also be able to make your relief request over the phone, so pay attention to whether your notice includes a phone number.
Your other option is to submit Form 843, Claim for Refund and Request for Abatement. This form allows taxpayers to claim the refunds they’re owed or request forgiveness from the IRS related to fees, penalties, interest, and some kinds of taxes.
The IRS also states that you don’t have to specifically say you’re requesting first-time abatement—they will look over all documentation and your tax history to see if you qualify for this type of relief first. If you have a good tax compliance history, the agency will contact you again to let you know if they’re granting you an abatement.
Your penalties will accrue interest until they’re paid. However, if you qualify for and are granted penalty abatement, and the applicable penalties are removed, the IRS will also take away that built-up interest.
For example, If you fail to pay your tax owed by the due date, you’ll receive a notice from the IRS in the mail with penalty details. You can then request IRS one-time forgiveness for the applicable tax year by calling the IRS or submitting Form 843. The agency will review your account details, including your tax history, and get back to you about their decision to grant first-time penalty abatement.
Other IRS forgiveness programs
Beyond IRS one-time forgiveness, you may have other options for tax relief in the event you can’t pay what you owe. The IRS has set up several programs to assist taxpayers who face a variety of hardships when trying to comply with their tax obligations.
Let’s explore the other options you can consider applying for if you qualify:
1. Reasonable Cause
One type of penalty relief you can apply for is called reasonable cause. You may be able to have penalties reduced or eliminated if you “acted with reasonable cause and in good faith” but were still unable to comply.
The IRS makes these determinations on a case-by-case basis after reviewing the details you provide and the type of penalty it is. Note that you can’t claim reasonable cause for estimated tax penalties.
What the IRS considers to be a valid reason may vary by case, but examples of reasonable cause could be as follows:
- A natural disaster, such as a flood or fire
- Death or serious illness of you or an immediate family member
- Electronic filing system issues that prevent compliance
- The inability to access applicable records
Unfortunately, the IRS states that a lack of knowledge, relying on a tax professional, mistakes, or a lack of funds do not count as valid reasons.
2. Offer in Compromise
You may have the option to get tax debt relief with an offer in compromise and end up paying less than you owe. Again, this is determined on a case-by-case basis. The IRS looks at your situation, including whether or not you can pay, your income and expenses, and your equity.
You will provide an offer to the IRS that is a portion of what you owe based on your situation. If the agency finds that your offer is reasonable and is what they can expect to collect from you, they will likely approve it.
You may be eligible to apply for an offer in compromise if:
- You are up to date on tax return filings and estimated payments, if applicable.
- You do not have an open bankruptcy case.
- You have a valid extension for the applicable tax year.
- You are an employer and are current on tax deposits for the current quarter and the last two quarters.
To apply, you need to send in Form 656, Forms 433-A (OIC) and 433-B, a $205 application fee, and your initial offer payment.
An offer in compromise could be a realistic next step for you if you’re unable to pay the taxes you owe. This arrangement keeps you in good standing with the IRS, so you don’t risk additional fees and penalties.
3. Payment Installment Agreement
You may also qualify for a payment installment agreement when you’re unable to pay your tax liability in full. Under this option, you won’t accrue any additional penalties or interest, you can offset your future tax refunds, and penalties won’t have an impact on your ability to get loans.
The IRS makes these payment plan agreements with certain taxpayers who have trouble making a lump-sum payment. Should you go this route, you would agree to pay a certain monthly amount within the given time frame.
With short-term plans, you pay what you owe within 180 days and don’t have to pay a setup fee. With long-term plans, you pay a monthly amount electronically or by check, and you have to pay a setup fee ranging from $31 to $225, depending on how you apply.
4. Innocent Spouse Relief
Innocent spouse relief is a unique form of tax relief offered by the IRS. If you filed jointly with your spouse or ex-spouse, and they understated the taxes you owe on your joint return without your knowledge, you may qualify for relief from paying any additional taxes.
However, you can’t claim this type of relief on your own income, employment taxes for the household, payments under the Individual Shared Responsibility, business taxes, or employment tax trust fund recovery penalties.
5. Currently not Collectible (CNC) Status
If you’re unable to pay your taxes, and paying even a portion would mean you couldn’t cover your basic living expenses, you can report to the IRS that your tax obligation is currently not collectible (CNC). Being granted the CNC status will temporarily delay any efforts from the IRS to collect what you owe.
This delay could continue until your financial situation improves. So, with CNC, your debt isn’t eliminated—collection is just delayed until you can pay it.
You may need to complete a collection information statement for CNC, such as Form 433-F, Form 433-A, or Form 433-B, so the IRS can review your financial situation and make a determination.
6. Filing Extensions
If you have trouble filing your tax return on time, you can always file an extension with Form 4868. This form must be submitted prior to the original filing deadline, usually April 15 of the year following the applicable tax year.
However, being granted an extension does not mean you have more time to pay the taxes you owe. It only means you have more time to file your tax return, typically until October 15 of the same year.
Applying for one-time forgiveness from the IRS
Understanding your tax relief options is key to applying for the right program and staying in good standing with the IRS. Anytime you have a tax problem, it may be best to communicate with a tax attorney who can help you determine your options for resolution.
The IRS one-time forgiveness program, or first-time penalty abatement, is a good option if you received an IRS penalty and have a solid history of filing and paying taxes on time. If you don’t qualify, you still have options, including reasonable cause requests, payment installment plans, offers in compromise, and innocent spouse relief.
The good news is that you don’t have to manage navigating all these tax laws and guidelines on your own. When you decide to work with the expert tax attorneys at Wiggam Law, we can assist you with any type of tax issue you’re dealing with and present you with the best path forward for your unique situation.
Call us at (404) 233-9800 or fill out our online consultation form today to talk to a tax attorney about your situation.