Tax Debt Forgiveness: 7 Things to Know in 2019

November 15, 2020

The year 2020 has not been an easy year, and paying your taxes from 2019 might not be any easier, especially if you have recently lost your job or have had your working hours reduced. If you have tax debt from 2019, you need to know about tax debt forgiveness so you can get out from under your burden and re-start your life.

7 Things to Know About Tax Debt Forgiveness in 2019

Know About the IRS’ Fresh Start Initiative

In 2011, the IRS introduced the Fresh Start Initiative, a program that is designed to help taxpayers who are struggling with tax debt by allowing them to pay off their debt through installments over time. The IRS began by raising the dollar amount that was required to trigger a federal tax lien from $5,000 to $25,000. It also provided more federal tax lien releases when a taxpayer agreed to an installment plan through direct deposit.

The IRS also expanded the offers-in-compromise debt forgiveness option to make it easier for taxpayers to qualify. In 2012, they expanded this option again to ease future income calculations and including more types of debt that could be considered when determining what a taxpayer could reasonably pay in relation to their tax debt. More real-world situations that cause people to fall behind in their finances were included in the algorithm to calculate how much a taxpayer could afford.

Know If You Qualify

Not every taxpayer will qualify for the Fresh Start Initiative, but many will. To qualify for this program, you have to:

  • Owe under $50,000, or are able to pay down a larger amount to get to $50,000
  • Pay off the remaining balance within five years
  • Be a first-time defaulter with the IRS
  • Agree to make your payments to the IRS through direct deposit
  • Ensure your tax filings are current to 2019
  • Keep making installments according to the agreement
  • Stay current with tax filings
  • Not incur any new tax debt during the installment agreement period

If you file for an offer-in-compromise through the Fresh Start Initiative, you can qualify for installments if you are able to pay off the agreed-upon balance in 12 months or less. If you’ve never fallen behind on your taxes before, you may also be eligible to have some penalties abated as well. Businesses have different qualifications, including having less than $25,000 in debt, but it must still be the first time they have defaulted on their tax debt.

Know What You Owe

Since the Fresh Start Initiative only applies to taxpayers who owe less than $50,000 in back taxes or can pay their debt down to $50,000, you must know exactly how much you owe before you apply. It might be difficult to determine exactly what you owe if you are several years behind in payments and because interest and penalties change the overall debt all the time. If you haven’t checked on your debt in a while, you will have to do it prior to getting help.

There are several ways in which to check your IRS debt. First, you can use the online portal, which is available Monday-Saturday between 6:00 a.m. ET and 9:00 p.m. ET and on Sunday between 10:00 a.m. ET and midnight ET. You will need to register your account first. You can also call the IRS directly and speak with a representative. The IRS can also provide the information by mail by filling out a form and requesting your debt amount.

Understand the Offer-in-Compromise Option

The offer-in-compromise option allows you to pay less than you owe to the IRS and still fulfill your debt. The amount you end up owing is based on your financial situation and ability to pay. Essentially, the IRS would rather get some of the debt it is owed than none of it. Once an offer-in-compromise is accepted by the IRS, you can pay the balance all at once or in installments if you qualify for the Fresh Start Initiative.

There are some situations that will likely disqualify you for an offer-in-compromise because the IRS does not want to make it too easy to get a large portion of what you owe forgiven. If you aren’t up-to-date on your tax filings, you haven’t made required estimated tax estimate payments, are in bankruptcy, or you are able to pay your full tax debt either in a lump sum or in installments, you may not be considered for an offer-in-compromise.

Know What Financial Items the IRS Considers for Offers-in-Compromise

As mentioned above, in 2012, the IRS expanded the offers-in-compromise option so that more taxpayers could qualify for it. Now, instead of looking ahead for five years to determine future earnings, it only looks at the next one or two years. This is important because you will likely be making more income in five years, but that might not be the case in the next two years, especially if you’ve recently lost your job or had to take a lower-paying position.

You are now also allowed to include student loans, credit card payments, bank charges, and other expenses under the allowable living expense standards considered for offers-in-compromise. This means that the IRS looks at your entire financial situation and not just a small snapshot of it that may not show all of the bills that you currently have. Additionally, you don’t even have to owe that much in taxes to qualify, as the dollar threshold was doubled.

Know How to Apply for an Offer-in-Compromise

The IRS has also made it fairly simple to apply for offers-in-compromise as well. You must complete IRS Form 656, which is the offers-in-compromise form for both individuals and businesses. A second form that is specific to individuals (IRS Form 433-A) or businesses (IRS Form 433-B) must also be completed and all requested documentation must be provided. You will also pay a non-refundable application fee of $186 if you do not meet the IRS’ low-income certification maximums.

Along with the forms, required documents, and application fee, you also must make an initial payment toward your tax debt. This amount is also non-refundable even if you are not given an offer-in-compromise. However, it will be applied to the amount you owe to the IRS. If you choose the lump-sum amount, you will want to submit 20% of what you owe as an initial payment. If you choose installments, the initial payment should be what you can afford.

Know How the IRS Will Respond

While you’re waiting to hear whether the IRS has accepted an offer-in-compromise, continue making payments as you proposed in your application. This will keep your account current and will show good faith. Collection activities will stop from the IRS, but they can still file a tax lien until the debt is satisfied. If the offer is accepted, be sure to adhere to all terms on IRS Form 656, which includes making scheduled payments and keeping your tax filings current.

If the IRS rejects your offer-in-compromise application, it thinks you can pay more toward your debt than you proposed within a reasonable amount of time. However, you can file an appeal within 30 days of the rejection and the IRS will reconsider your application. If you still do not qualify, check out the other tax debt forgiveness options such as installments and the withdrawal of tax liens.

Tax law can be extremely complicated and if you’re struggling to pay your taxes from 2019 or earlier, you’re likely already stressed enough about your financial situation without adding tax law lessons to your plate. Call Geaux Tax Resolution and our experienced tax professionals will provide you with your debt forgiveness options and work with you throughout the entire process.