Tax Debt Relief: IRS Tax Debt Forgiveness Programs

If you have back taxes or a large, current tax bill you're struggling to pay down, seeking tax debt relief can be possible. Tax debt can happen to anyone, even if you are diligent with your finances. In fact, according to the IRS, 18.6 million Americans owed overdue taxes in 2022. Plus, taxpayers owed more than $120 billion in penalties, back taxes and interest.  

Those seeking relief from tax debt may be able to take advantage of programs, though not all options are useful for your financial situation. Before making your decision, it’s crucial you understand what types tax debt relief are out there and how they work.

What Is Tax Debt Relief?

Tax debt relief refers to programs, incentives or even steps you take as a taxpayer to legally manage, pay off or minimize the amount you pay in taxes. The goal is to help those who can’t afford to or are struggling to pay their taxes, including any overdue tax bills.

One common reason people end up owing more in taxes than anticipated is that they didn’t withhold enough taxes throughout the year. This situation happens when you under-report your income and there aren't enough taxes withheld from your paycheck. Or, if you're reporting self-employment income, you may have paid less in quarterly taxes in the applicable tax year.

Some tax debt relief programs are offered by the IRS and tax settlement companies.

6 IRS Tax Debt Relief Programs

The IRS provides tax debt relief programs to those who haven’t filed tax returns, can’t pay their taxes or owe a certain amount in back taxes. Most of the popular programs outlined below are designed to ease any burden or hardship taxpayers may face.

1. Installment Agreement (IA)

An IRS installment agreement is a type of payment plan that gives you more time to pay off taxes you owe. Using this program means you don’t have to pay off all the taxes, fees or interest you may owe at once. Interest and penalties will continue to accrue until your balance with the IRS is paid off.

Most taxpayers can apply for an installment agreement offered through the IRS, though you can only apply online if you meet their qualification requirements. You may also have to pay setup fees, though those who qualify as low-income taxpayers may be able to get them waived.

Short-Term Payment Plan

The IRS allows you to choose a short-term plan where you can pay back what’s owed for a term up to 180 days. You won’t need to pay an application fee, but you’ll still have to pay any accrued penalties and interest. If approved, you can pay via direct deposit from a bank account, mail a check or money order or use your debit or credit card (there is a fee associated with this option).

Long-Term Payment Plan

A long-term payment plan is for taxpayers who need more than 180 days to pay back what’s owed.

Application and setup fees you pay will depend on factors like your method of payment:

• Monthly, automatic withdrawals: $31
• Monthly, manual payments: $130 (if applying online)

If you qualify as a low-income taxpayer, your fee drops down to $43, and you may get the fee reimbursed if you can meet certain requirements. Also, if you pay using your credit or debit card, there are fees you’ll be charged.

2. Offer In Compromise (OIC)

The offer in compromise (OIC) tax debt relief program may let you settle to pay less taxes that you actually owe. Though not necessarily a tax forgiveness program, you may be able to pay the full amount you owe if you truly can’t afford it or it could cause financial hardship if you do pay it off.

The IRS will consider your circumstances such as your income, expenses, assets you have and your ability to pay when you submit your application. To qualify, you'll need to have filed all your required tax returns and made applicable payments, filed an extension and aren't actively in an open bankruptcy proceeding. There is also a $205 application fee.

3. Currently Not Collectible (CNC)

You can request that the IRS put your tax status to “currently not collectible” (CNC). So, when your taxes are in collections, the IRS can delay collection temporarily until you’re in a better financial position. Your tax debt isn't totally forgiven, and interest and penalties will still accrue on the amount you owe. The IRS may still have a right to file a tax lien against you.

To qualify, your tax bill needs to be currently in collections, able to provide proof of your financial situation, and fill out a Collection Information Statement. The IRS will review your situation each year to determine whether you still qualify for CNC status.

4. Penalty Abatement

A penalty abatement means the IRS will waive the penalty owed if it’s your first time in this situation. To qualify, you will need to meet requirements such as having filed your tax return or requested an extension, you’re up to date on all tax payments, and you haven't had any IRS penalties within the past 3 years.

The IRS will most likely send you a notice in the mail that may qualify you for this tax debt relief program. You can call or mail a written statement or file Form 843 (Claim for Refund and Request for Abatement).

5. Innocent Spouse Relief

The innocent spouse relief program will release you from paying taxes that your spouse owes because of errors in your joint tax return that you weren't aware of. It also applies to circumstances when you didn’t consent to filing a joint return with your spouse and you found that you now owe taxes due to a jointly filed return.

Contact the IRS to see what forms you need to file, as well as next steps to be taken.

6. Injured Spouse Relief

The injured spouse relief program can help you get some of your federal tax return that ended up being taken back to pay your spouse's debt. Some of these debts include amounts owed to federal agencies, state income taxes, money owed back from unemployment compensation, and child support that's past due.

You will need to file Form 8379 within 3 years of when you filed the tax return or 2 years from when you paid your taxes (your timeline will be whichever was later). To qualify, you'll need to have filed a joint tax return, your refund was applied to your spouse’s unpaid debts and you weren't responsible for them.

Alternative Tax Debt Relief Options

If you don’t qualify for any of the above IRS tax forgiveness or relief programs, you can still find other options to space out your payments to help make it more affordable.

Tax Settlement Company

There are some legitimate tax settlement companies that can help you minimize or totally get rid of your tax obligations, and even stop the IRS from collecting back taxes for a fee. However, there are also scams. 

The Federal Trade Commission (FTC) suggests trying to reach an agreement with the IRS or state tax authority first because you're still on the hook for taxes, fees and penalties owed if the tax relief company you work with ends up not fulfilling their promise. Some companies may lose, delay or even outright not submit your application. Red flags include making outrageous promises, asking you to pay monthly fees or requiring full, upfront payment before starting services.

Credit Cards

You can use your credit card to pay for the amount you owe and pay off the balance over time. It may be a good solution if you don’t have a huge amount and can’t qualify for any of the IRS programs. The IRS may charge credit card processing fees, and your credit card’s interest rates may be high. Have a plan to pay this debt off incrementally or in full before going this route.

Personal Loan

A personal loan may be a great choice if you owe a large amount and you want a lower interest rate compared to what you’d pay with a credit card or what you’d pay with any of the IRS programs. Once you get the loan proceeds, you can make a direct payment to the IRS in one lump sum. All you need to do is to pay back your personal loan on time.

401(k)

Cashing out a 401(k) is most likely seen as a last resort, as you may have to pay taxes and penalties when withdrawing money. Plus, taking money from this account could mean less in earnings and can put your retirement at risk if you don’t put the money back at some point.

Home Equity Loan or Home Equity Line Of Credit (HELOC)

A home equity loan or home equity line of credit (HELOC) is a type of secured loan that allows you to draw from the equity in your home. Depending on how much home equity you have, you can borrow a large amount, and interest rates can be lower compared to other options. While a home equity loan or HELOC may offer lower interest rates, you may be putting your home at risk if you default on the loan. While our sister company, Rocket Mortgage®, offers home equity loan, it doesn’t offer HELOCs.

The Bottom Line: IRS Forgiveness Programs Can Provide Relief From Tax Debt

Owing taxes can feel overwhelming, especially when you’re not sure how you can afford to pay your tax debt. Luckily, the IRS offers tax forgiveness and relief programs to ensure you’re still able to get a handle on your financial situation.

Resolving your tax debt with the IRS will ensure you’re complying with the law. If you don’t pay your taxes to the IRS on time, you could face consequences such as increased penalties, having your wages garnished or, even worse, jail time.

To better help you track your money during tax season – and throughout the year – consider using Rocket Money^SM. That way, you’ll know much is going in and out and have an easy way to see where else you can save money to put toward your tax bills.