How to Get Tax Debt Forgiveness With the IRS or State

Tax debt forgiveness allows the IRS or state to reduce your tax debt, often if you can show financial hardship. While the process can take time, it can significantly lower what you owe and help you manage your debt. This guide covers your best options for federal and state tax debt relief and how to apply.

What is tax debt forgiveness?

Tax debt is the remaining balance of what you owe the IRS if you don’t pay in full when you file your return. The IRS and state government expect you to make a plan to pay tax debt promptly. If you don’t pay, the balance will continue to grow due to interest and penalties. You can also face wage garnishment and liens. 

But tax debt forgiveness can help if you can’t afford to pay the debt or don’t think you should have to. When you qualify for tax debt forgiveness, the IRS forgives some or all of your balance. States have different tax laws and processes for collecting what you owe. Some states offer tax debt forgiveness, but not all of them.

The exact amount of forgiveness depends on the program and your circumstances. Some of the most popular options include offers in compromise, currently not collectible status, and innocent spouse relief.

3 ways to get federal tax debt forgiveness

You have multiple options when pursuing tax debt forgiveness and settling tax debt with the IRS. Here are the best ones to consider.

Option	Amount forgiven	Best for
Offer in Compromise	Some	Organized taxpayers who can afford monthly payments
Currently not collectible status	All	When you can’t afford any payment amount
Innocent spouse relief	All	A spouse with a joint tax return and no information about the debt

Offer in Compromise

Taxpayers can attempt to make an Offer in Compromise when they can’t afford to pay their entire tax bill. Instead, they work with the IRS to make an offer—a fraction of what they owe—and if the IRS accepts, the tax debt is considered settled.

Don’t get too excited about paying pennies on the dollar with the IRS. Statistically speaking, less than half of applications for an Offer in Compromise get accepted. 

How to apply

The application process includes multiple steps, but it’s a straightforward process. Here’s how to apply. 

1. Confirm that you qualify: Use the IRS’s Offer in Compromise pre-qualifier tool to understand whether you qualify. While there’s no set-in-stone rule about who qualifies, you must demonstrate genuine financial hardship, which usually includes minimal income with significant monthly expenses.
2. Determine what you can afford: When you apply, determine how much you’re willing and able to pay. The IRS will review your income and assets and determine whether the amount you offer is satisfactory based on your documented financial hardship.
3. Complete the application: As part of the application process, you’ll fill out Form 656, which includes Form 433-A. Businesses will fill out Form 433-B.
4. Pay the fee: The IRS charges a $205 application fee. But if you meet low-income certification guidelines, you won’t need to pay.

Currently not collectible status

If you can’t afford to pay your taxes, you can apply for currently not collectible (CNC) status. If approved, the IRS can’t require you to pay your tax debt—for now.

The IRS will continue to monitor your financial situation. If, at any point, the organization determines that your situation has changed, you may be required to start paying your debt. Your tax debt will continue to accrue interest and late payment penalties while you have CNC status. 

The IRS has a 10-year statute of limitations to collect tax debts. If you remain within CNC status for 10 years, the 10-year-old tax debt will disappear.

Read More

How to Get Uncollectible Status With the IRS 

How to apply

You must complete the application process to apply for CNC status. If you have questions, contact the Taxpayer Advocate Service for free assistance. Here’s how to file. 

1. Complete the forms: You must file multiple application forms, including Form 433-A or Form 433-B and Form 433-F.
2. Submit proof: Demonstrate financial hardship by providing information about your income, assets, and necessary monthly expenses.
3. File tax returns: Make sure your tax returns are current, even if you can’t afford to pay. The IRS will continue to monitor your financial situation while you have CNC status. 

What determines approval?

Jim McCarthy

CFP®

Whether you get approved for an Offer in Compromise or currently uncollectible status depends on your financial condition—it is not an either-or. The IRS will not put someone in currently not collectible if it determines the debtor has the means to make payments.

Innocent spouse relief

The IRS may also offer tax relief if you filed jointly with a spouse and didn’t know your former spouse made errors with the tax return. Eligibility for innocent spouse relief is tough; you need to prove you truly had no knowledge of the errors.

How to apply

You must complete the IRS application when you request innocent spouse relief. Like other types of tax debt forgiveness, innocent spouse relief is a long process that takes time. Here’s how to get started. 

1. Complete the form: If you believe you qualify for relief, file Form 8857.
2. File your taxes: Once you file the form, you must continue to file tax returns and pay your taxes. Stay up to date on current taxes to avoid additional penalties and interest. 
3. Wait for the decision: The IRS will contact your spouse or former spouse for additional information. It can take up to six months to get a decision letter. Once you receive it, you can appeal the decision if you disagree.

Can you get state tax debt forgiveness?

Because each state sets its own tax laws, your path to state tax debt forgiveness will depend on where you live. Rather than work with the IRS, you’ll try to establish a payment with your state comptroller.

Every state offers some form of tax debt forgiveness, but some are more generous than others. You can typically apply for an offer in compromise or defer payments due to financial hardship. 

Here are helpful tax debt forgiveness links for your state, if applicable.

State	Does the state offer forgiveness?	Income tax resource
Alabama	Yes	Alabama tax relief
Alaska	No state income tax	No state income taxes
Arizona	Yes	Arizona taxes
Arkansas	Yes	Arkansas tax relief
California	Yes	California tax relief
Colorado	Yes	Colorado tax relief
Connecticut	Yes	Connecticut taxes
Delaware	Yes	Delaware taxes
Florida	No state income tax	No state income taxes
Georgia	Yes	Georgia tax relief
Hawaii	Yes	Hawaii tax relief
Idaho	Yes	Idaho taxes
Illinois	Yes	Illinois taxes
Indiana	Yes	Indiana taxes
Iowa	Yes	Iowa tax relief
Kansas	Yes	Kansas tax relief
Kentucky	Yes	Kentucky tax relief
Louisiana	Yes	Louisiana tax relief
Maine	Yes	Maine tax relief
Maryland	Yes	Maryland taxes
Massachusetts	Yes	Massachusetts tax relief
Michigan	Yes	Michigan tax relief
Minnesota	Yes	Minnesota tax relief
Mississippi	Yes	Mississippi taxes
Missouri	Yes	Missouri tax relief
Montana	No	Montana taxes
Nebraska	Yes	Nebraska taxes
Nevada	No state income tax	No state income tax
New Hampshire	No state income tax	No state income tax on wages and salary
New Jersey	Yes	New Jersey taxes
New Mexico	Yes	New Mexico taxes
New York	Yes	New York tax relief
North Carolina	Yes	North Carolina tax relief
North Dakota	Yes	North Dakota taxes
Ohio	Yes	Ohio tax relief
Oklahoma	Yes	Oklahoma taxes
Oregon	Yes	Oregon tax relief
Pennsylvania	Yes	Pennsylvania tax relief
Rhode Island	Yes	Rhode Island taxes
South Carolina	Yes	South Carolina taxes
South Dakota	No state income tax	No state income tax
Tennessee	No state income tax	No state income tax
Texas	No state income tax	No state income tax
Utah	Yes	Utah tax relief
Vermont	Yes	Vermont taxes
Virginia	Yes	Virginia tax relief
Washington	No state income tax	No state income tax
Washington, D.C.	Yes	Washington, D.C. taxes
West Virginia	Yes	West Virginia tax relief
Wisconsin	Yes	Wisconsin tax relief
Wyoming	No state income tax	No state income tax

What do tax debt forgiveness forms look like?

CNC requests and Offer in Compromise applications have the same application forms, but the innocent spouse relief form is separate. You can fill out the application yourself, but you might be better off working with a tax relief company. The forms are long and complicated—and you’ll need to know what other paperwork to gather.

As an example, let’s look at the Offer in Compromise process. For an Offer in Compromise, you’ll fill out Form 656 booklet, which contains Form 433-A (for individuals) and Form 433-B (for businesses). Before you can apply, you must file all tax returns you’re legally required to file.

The form is lengthy and requires detailed information, including:

• Personal and household information
• Employment information
• Personal asset information
• Self-employment information
• Business asset information
• Business income and expense information
• Monthly household income and expense information

You’ll calculate your minimum offer amount while filling out this form. Here’s what it looks like:

Tax debt forgiveness applications and forms can be handled on your own as the taxpayer, but getting a tax professional likely reduces errors.

Jim McCarthy

CFP®

Pros and cons of tax debt forgiveness

When you can’t afford to pay your tax debt, it’s hard to imagine any cons to seeking out debt forgiveness. But here are several pros and cons to weigh.

Pros

• Get immediate relief

  You can settle for a lower amount you can manage (Offer in Compromise) or buy time until you can pay your debt (CNC).

• Avoid other debt

  Alternatives to tax debt forgiveness could entail taking on high-interest debt that’s worse than the penalties and interest you’ll owe the IRS.

• Avoid wage garnishments and asset liens

  If you fail to pay the IRS what you owe and don’t establish relief through one of its programs, the IRS can start to garnish your wages and place liens on your property.

Cons

• Not guaranteed

  You can apply for tax debt forgiveness, but you’re not guaranteed approval. In some cases, you might pay application fees for nothing.

• Significant work

  The application process is complex and full of paperwork. You may need to hire a tax professional to help you through it.

• Impact on credit and finances

  CNC status can lead to a drop in your credit score, and you’ll likely have to pay the debt eventually—just with interest and penalties accrued.

• Taxability

  Debt forgiveness—including tax debt forgiveness—may be considered taxable income for federal income tax purposes.

Alternatives to tax debt forgiveness programs

In some situations, tax debt forgiveness may not be possible—or it may not be your best path forward. Consider these alternatives for seeking tax debt forgiveness:

Installment plan with the IRS

If you can’t pay the lump sum owed when you file your taxes, you can set up a payment plan with the IRS. The IRS offers short- and long-term debt repayment plans.

• Short-term payment plans: If you choose this option, you don’t need to apply for a formal payment plan. You have up to 180 days to pay your full tax debt, and your account will accrue interest and penalties during this time.
• Long-term payment plans: This is the IRS’s more formalized installment agreement for when you need more than 180 days to pay your debt. You’ll make a formal request and, if approved, pay a setup fee ($37 or $149, depending on the payment method). You’ll also owe interest and penalties during the long-term installment agreement.

Personal loan

If you don’t want to be in debt to the IRS (which has the power to garnish your wages and place liens on your property if you don’t pay), you can apply for a personal loan. Personal loans can have high origination fees and charge interest, but the consequences of defaulting on a personal loan are less severe than defaulting on IRS payments.

You’ll need a good credit score to qualify for a personal loan and to stay on top of loan repayments to maintain that good credit score. Here are the best personal loans to consider for tax debt repayment.

Family loan

If you don’t have a great credit score and don’t want to—or aren’t able to—use a tax debt forgiveness program through the IRS, you can turn to family and friends for help repaying your tax debt.

Family loans can complicate personal relationships with loved ones, so make sure you and the lending friend or family member have a solid understanding of how you’ll repay your debt and how to navigate tough conversations if you fall behind.

Bankruptcy

If other tax repayment options fail, consider filing for Chapter 13 bankruptcy as a final step. It’s not a perfect solution because it doesn’t automatically discharge every type of tax debt, and it extends the repayment timeline if you have CNC status. 

Filing for bankruptcy will affect your life for years, so it’s essential to consult with a bankruptcy attorney before proceeding. 

FAQ

How long does it take to get approved for a tax debt forgiveness program?

How long it takes to get approved for a tax debt forgiveness program depends on which you apply for. It might take the IRS six months to a year to approve an offer in compromise. 

Currently not collectible applications are variable, and states have their own processes—with their own timelines—when seeking state tax forgiveness.

Is tax debt forgiveness considered taxable income?

Forgiven debt through an Offer in Compromise is not considered a taxable event. You won’t need to pay taxes on the amount your current tax debt is reduced by.

Do I need a tax attorney to apply for a tax debt forgiveness program?

You don’t legally need a tax attorney to apply for a tax debt forgiveness program, but it can certainly help. The programs are complicated, and the forms can get confusing. Working with a professional might improve your chances of qualifying.

What happens if I default on a tax forgiveness agreement?

If you default on a tax forgiveness agreement (Offer in Compromise), the IRS can attempt to collect the entire amount you originally owed (minus anything you’ve paid). It will also reinstate penalties and interest and can place a lien on the account. In short, whatever you do, don’t default on a tax forgiveness agreement.

Can I negotiate directly with the IRS or state taxation agency?

An Offer in Compromise is your way to negotiate with the IRS and your state’s taxation agency if your state offers it. Most applications for Offers in Compromise are rejected, so be strategic about when you apply and how much you offer to pay.

Are there special debt forgiveness programs for businesses?

The IRS and several states offer debt forgiveness programs for businesses and self-employed individuals. For instance, businesses can apply for an Offer in Compromise through the IRS.

Does applying for a tax debt forgiveness program affect my credit score?

Applying for tax debt forgiveness does not affect your credit score, but getting approved might. Offers in Compromise don’t affect your credit, but currently not collectible status can lower your score—if you owe the IRS more than $10,000 and the organization files a Notice of Federal Tax Lien.

Can interest and penalties be forgiven along with the principal debt?

When you negotiate an Offer in Compromise, you agree to a dollar amount you’ll pay to consider yourself debt-free, including interest and penalties. However, if you get CNC status with the IRS, late penalties and interest will continue to accrue.