On this page
What's next
Earn a high-yield savings rate with JG Wentworth Debt Relief
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
Owing money to the Internal Revenue Service can be one of the most stressful financial situations Americans face. The letters keep arriving, interest and penalties accumulate, and the debt grows larger with each passing month. Many taxpayers wonder if there’s any way to reduce what they owe or have their tax debt forgiven entirely.
The good news is that IRS debt forgiveness is indeed possible, though it’s neither automatic nor guaranteed. Understanding the various programs and options available can make the difference between years of financial struggle and a fresh start.
Understanding IRS debt and why it grows
Before exploring forgiveness options, it’s important to understand how IRS debt works. When you owe taxes, the IRS doesn’t just wait patiently for payment. The agency adds both penalties and interest to your original tax liability, which can cause your debt to balloon quickly. The failure-to-pay penalty alone is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to 25% of your unpaid taxes. Interest compounds daily based on the federal short-term rate plus 3%.
This means a $10,000 tax debt can easily become $15,000 or more within just a few years if left unaddressed. The IRS has extensive collection powers, including the ability to garnish wages, levy bank accounts, and place liens on property. These consequences make resolving tax debt a priority for anyone who owes.
Is IRS debt forgiveness really possible?
Yes, the IRS does offer several programs that can reduce or eliminate tax debt, but the term “forgiveness” can be misleading. The IRS doesn’t simply erase debt out of goodwill. Rather, these programs are designed to collect as much as reasonably possible from taxpayers who genuinely cannot pay their full tax liability. The IRS operates on the principle that collecting some amount is better than collecting nothing, especially when a taxpayer’s financial situation makes full payment unlikely.
The most significant forgiveness program is the Offer in Compromise, but there are other options including penalty abatement, Currently Not Collectible status, and in some cases, bankruptcy. Each program has specific eligibility requirements and processes, and choosing the right option depends on your individual financial circumstances.
Take your next step towards being debt-free
"*" indicates required fields
Offer in Compromise: The primary forgiveness program
The Offer in Compromise (OIC) is the IRS program most people think of when they hear about tax debt forgiveness. This program allows qualified taxpayers to settle their tax debt for less than the full amount owed. The IRS accepts offers when the amount offered represents the most the agency can expect to collect within a reasonable period.
To qualify for an OIC, you must meet several criteria:
- First, you must have filed all required tax returns and made all required estimated tax payments for the current year.
- You cannot be in an open bankruptcy proceeding.
- If you’re a business owner with employees, you must have made all required federal tax deposits for the current and past two quarters.
The IRS evaluates OIC applications based on doubt as to collectibility, doubt as to liability, or effective tax administration:
- Doubt as to collectability means the IRS doesn’t believe you can pay the full amount before the collection statute expires. This is the most common basis for acceptance.
- Doubt as to liability involves a legitimate dispute about whether you actually owe the tax.
- Effective tax administration applies when collection of the full amount would create economic hardship or be unfair for other exceptional circumstances.
The application process requires submitting detailed financial information, including Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. You’ll need to document your income, expenses, assets, and liabilities. The IRS uses this information to calculate your reasonable collection potential (RCP), which is essentially what the agency believes it can collect from you through levies and monthly payments over a certain period.
There’s a $205 application fee (which can be waived for low-income taxpayers) and you must include an initial payment with your offer. You can choose between a lump sum offer (paid in five or fewer payments within five months of acceptance) or a periodic payment offer (paid in monthly installments over six to 24 months).
The acceptance rate for OICs has historically hovered around 30-40%, meaning most applications are rejected. The IRS carefully scrutinizes each application to ensure taxpayers aren’t hiding assets or understating their ability to pay. If your offer is accepted, you must comply with all tax laws for the next five years, or the agreement may be terminated and the original debt reinstated.
Penalty abatement: Reducing what you owe
While not technically debt forgiveness, penalty abatement can significantly reduce your total tax bill. The IRS charges various penalties for late filing, late payment, and accuracy-related issues. These penalties can represent a substantial portion of what you owe, sometimes exceeding the original tax liability itself.
The IRS offers several types of penalty relief:
- First-time penalty abatement (FTA) is available to taxpayers who have a clean compliance history. If you’ve filed and paid on time for the past three years, you may qualify to have failure-to-file and failure-to-pay penalties removed for a single tax year. This is one of the easiest forms of relief to obtain, yet many taxpayers don’t know it exists.
- Reasonable cause penalty abatement requires demonstrating that you failed to meet your tax obligations due to circumstances beyond your control. Acceptable reasons include serious illness, death in the immediate family, natural disasters, inability to obtain records, or erroneous advice from a tax professional or the IRS itself. You must show that you exercised ordinary business care and prudence but were unable to comply.
- Statutory exceptions apply in specific situations defined by law, such as incorrect written advice from the IRS. Administrative waivers may be granted when the IRS determines that penalties should not apply due to administrative errors or other reasons.
To request penalty abatement, you can call the IRS, respond in writing to a penalty notice, or submit Form 843 (Claim for Refund and Request for Abatement). Be prepared to provide detailed documentation supporting your request. Even if your request is denied, the underlying tax debt and interest remain, but eliminating penalties can make the debt more manageable.
Currently Not Collectible status: Temporary relief
If you’re facing genuine financial hardship and cannot pay your tax debt or even make monthly payments without jeopardizing your ability to pay basic living expenses, you may qualify for Currently Not Collectible (CNC) status. This designation doesn’t forgive your debt, but it temporarily suspends IRS collection activities.
When the IRS places your account in CNC status, the agency acknowledges that collecting from you would create undue hardship. During this time, the IRS will not levy your wages or bank accounts, though any existing liens remain in place. Interest and penalties continue to accrue, and the IRS may file a Notice of Federal Tax Lien to protect its interests.
To qualify for CNC status, you must prove that paying your tax debt would leave you unable to meet necessary living expenses such as food, housing, transportation, and medical care. The IRS uses standardized expense allowances but may consider higher amounts in certain circumstances. You’ll need to complete Form 433-F (Collection Information Statement) and provide documentation of your income and expenses.
CNC status is not permanent. The IRS reviews these accounts periodically, typically every year or two, and if your financial situation improves, collection activities may resume. Additionally, if you receive a substantial refund in future years, the IRS may apply it to your outstanding balance. The collection statute of limitations continues to run while your account is in CNC status, so the debt may eventually expire if your situation doesn’t improve.
Installment agreements: Paying over time
While not debt forgiveness, installment agreements deserve mention because they provide a realistic path to resolving tax debt for many taxpayers. If you can’t pay your full tax bill immediately but can afford monthly payments, an installment agreement allows you to pay over time while avoiding more aggressive collection actions.
For debts of $50,000 or less, you can apply online for a streamlined installment agreement without providing detailed financial information. The IRS will automatically approve your request as long as you meet certain criteria. You can take up to 72 months to pay, though shorter payment periods mean less interest accumulation.
For larger debts or if you can’t afford the minimum payment required under a streamlined agreement, you can request a partial payment installment agreement (PPIA). This requires submitting detailed financial information similar to an OIC application. With a PPIA, your monthly payment is based on your ability to pay rather than an amount that would pay off the debt before the collection statute expires. This means some of the debt may go uncollected when the statute expires, providing a form of partial forgiveness.
Innocent spouse relief: When it’s not your debt
If you filed a joint tax return with a spouse or former spouse and believe you shouldn’t be held responsible for errors, omissions, or unpaid taxes, you may qualify for innocent spouse relief. This isn’t traditional debt forgiveness but rather a determination that you’re not liable for the debt in the first place.
There are three types of relief:
- Innocent spouse relief applies when your spouse or former spouse understated tax on a joint return.
- Separation of liability relief allocates additional tax owed between you and your spouse or former spouse.
- Equitable relief may be available when you don’t qualify for the other types but it would be unfair to hold you liable.
To qualify, you generally must show that you didn’t know and had no reason to know about the understatement or underpayment, that you signed the return under duress, or that other factors make it unfair to hold you responsible. You must request relief by filing Form 8857 within two years of the date the IRS first attempted to collect the tax from you, though exceptions apply.
Bankruptcy: The last resort
In certain circumstances, tax debt can be discharged through bankruptcy. This is a complex area of law with strict requirements, and many types of tax debt cannot be discharged. However, for some taxpayers facing overwhelming financial obligations, bankruptcy may provide the only path to a fresh start.
For income tax debt to be dischargeable in bankruptcy, it must generally meet the “3-2-240” rule: the tax return must have been due at least three years before filing bankruptcy, you must have filed the return at least two years before filing bankruptcy, and the IRS must have assessed the tax at least 240 days before you file bankruptcy. Additionally, you cannot have committed fraud or willful tax evasion, and the debt must be from income taxes (payroll taxes and certain other taxes are not dischargeable).
Chapter 7 bankruptcy can eliminate qualifying tax debt entirely, while Chapter 13 bankruptcy allows you to pay back tax debt over a three-to-five-year period, potentially at a reduced amount. Given the complexity and serious implications of bankruptcy, this option should only be pursued after consulting with a qualified bankruptcy attorney who understands tax law.
The statute of limitations: When tax debt expires
Many taxpayers don’t realize that the IRS has a limited time to collect tax debt. The Collection Statute Expiration Date (CSED) is generally 10 years from the date the tax was assessed. Once this period expires, the IRS can no longer legally collect the debt, effectively forgiving it.
However, certain actions can extend or suspend the CSED. Filing for an Offer in Compromise, requesting a Collection Due Process hearing, filing for bankruptcy, or living outside the United States can all pause or extend the clock. The IRS also has ways to renew the collection period in some circumstances.
While waiting out the statute of limitations might seem like an appealing strategy, it’s risky. The IRS can take aggressive collection actions during this period, and you’ll continue accumulating interest and penalties. Additionally, a federal tax lien can remain on your credit report for years after the debt is satisfied or expires, damaging your creditworthiness.
How to apply for IRS debt relief
If you believe you qualify for any form of IRS debt relief:
- Start by gathering documentation of your financial situation. This includes recent pay stubs, bank statements, mortgage or rent payments, utility bills, medical expenses, and documentation of any extraordinary circumstances affecting your ability to pay.
- For penalty abatement or CNC status, you can often work directly with the IRS by calling the number on your notice or the general helpline.
- For Offers in Compromise and innocent spouse relief, you’ll need to submit formal applications with supporting documentation. The IRS provides detailed instructions and worksheets to help calculate appropriate offer amounts.
Consider whether you need professional help. Tax attorneys, CPAs, and enrolled agents can assist with complex cases, negotiate with the IRS on your behalf, and improve your chances of success. While this involves additional cost, professional representation can be worthwhile for large debts or complicated situations. Be wary of companies that guarantee they can settle your tax debt for “pennies on the dollar” – if an offer sounds too good to be true, it probably is.
Moving forward after debt relief
If you successfully obtain any form of IRS debt relief, it’s crucial to stay compliant going forward. Most relief programs require you to file and pay taxes on time for several years afterward, or the agreement may be voided and your original debt reinstated. Adjust your withholding or make estimated tax payments to ensure you don’t accumulate new tax debt.
Use the experience as motivation to better understand your tax obligations and maintain good records. Consider working with a tax professional, especially if your financial situation is complex or your past tax troubles stemmed from confusion about what you owed.
The bottom line
IRS debt forgiveness is possible, but it requires meeting specific criteria and following proper procedures. The key is taking action rather than ignoring the problem. The longer you wait, the larger your debt grows and the fewer options you may have. Contact the IRS or a qualified tax professional to explore which relief programs might work for your situation. While the process can be complex and time-consuming, achieving resolution is possible and can provide the fresh financial start you need.
There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
About the author
Recommended reading for you
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.