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Personal Finance

Tax Debt Forgiveness With the IRS or State

Facing any debt can be scary, but it’s especially daunting when you owe the IRS. The IRS can garnish your wages and place liens on your property. If you can’t afford to pay your back taxes, you must devise a plan quickly.

Fortunately, you may be able to take advantage of one of several tax debt forgiveness programs with the IRS (and maybe with your state). Qualifying for tax debt forgiveness is challenging, though—you need to demonstrate real financial hardship that makes it impossible to pay what you owe.

Getting approved for tax debt relief can be the momentary break you need as you recalibrate and figure out what to do next in repairing your finances.

What is your tax debt?

Tax debt is the remaining balance of what you owe the IRS if you don’t pay in full when you file your return. You’ll be expected to make a plan to pay that tax debt promptly, which will accrue interest in the meantime. You’ll also owe penalties for late payments.

Eventually, if you don’t pay your tax debt, the IRS has the power to garnish your wages or money directly from your bank account, and it can also place a lien on your property.

Federal vs. state tax debt

Depending on your state, you may also have to pay state income taxes. If you can’t afford to pay all of what you owe your state, you’ll also have to figure out a plan for the remaining balance.

Each state has its own tax laws and processes for collecting what you owe; some states offer tax debt forgiveness, but not all of them.

What is the IRS tax debt forgiveness program?

The IRS doesn’t offer a single tax debt forgiveness program. Instead, taxpayers who can’t pay their back taxes (or this year’s impending tax debt) have multiple options they can choose from to pursue tax debt forgiveness, including:

  • Offer in compromise
  • Currently not collectible status
  • Innocent spouse relief

We’ll walk you through these various ways to settle your tax debt with the IRS below.

IRS tax debt forgiveness programDetails
Offer in compromiseRather than pay your full tax debt, offer to pay a fraction of the debt you can afford.
Currently not collectible statusGet the IRS to confirm that your financial status currently makes it impossible for you to pay your taxes.
Innocent spouse reliefProve to the IRS that your former spouse made errors on the return you didn’t know about.

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

You can use the IRS’s offer in compromise pre-qualifier tool to understand if you’re likely to be approved. While there’s no set-in-stone rule about who qualifies, you must be able to demonstrate true financial hardship: little to no income with mounting necessary monthly expenses.

You’ll want to feel confident going into the application process, as there’s a $205 application fee whether you get approved or not (waived if you meet low-income certification guidelines).

When you apply, you’ll need to determine how much you’re willing and able to pay (and generally make a lump-sum payment of 20% of that amount). The IRS will review your income and assets and determine if the amount you’ve offered is satisfactory based on your documented financial hardship.

As part of the application process, you’ll fill out Form 656, which includes Form 433-A. Businesses will fill out Form 433-B.

Currently not collectible status

Alternatively, if you cannot currently afford to pay your taxes, you can apply for currently not collectible (CNC) status. If approved, the IRS will not be able to 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.

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

How to apply

Not everyone gets approved for CNC status. Like with an offer in compromise, you’ll need to file complex forms (again, it’s Form 433-A or Form 433-B—and this time, Form 433-F) and demonstrate your income, assets, and necessary monthly expenses.

Even if you achieve CNC status, your tax debt will continue to accrue interest and late payment penalties. That means when your CNC status is eliminated, you’ll owe more money than you would’ve if you’d paid in the first place.

Ask the expert

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, as you have to prove you truly had no knowledge of the errors.

If you believe you can qualify, you’ll file Form 8857.

Can you get state tax debt forgiveness?

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

Some states may waive interest; others may waive penalties. Some states simply won’t allow you to minimize tax debt while other states might not have state income taxes at all.

In the table below, you’ll find helpful links for your state, if applicable.

StateIncome tax resource
AlabamaAlabama tax relief
AlaskaNo state income taxes
ArizonaArizona taxes
ArkansasArkansas tax relief
CaliforniaCalifornia tax relief
ColoradoColorado tax relief
ConnecticutConnecticut taxes
DelawareDelaware taxes
FloridaNo state income taxes
GeorgiaGeorgia tax relief
HawaiiHawaii tax relief
IdahoIdaho taxes
IllinoisIllinois taxes
IndianaIndiana taxes
IowaIowa tax relief
KansasKansas tax relief
KentuckyKentucky tax relief
LouisianaLouisiana tax relief
MaineMaine tax relief
MarylandMaryland taxes
MassachusettsMassachusetts tax relief
MichiganMichigan tax relief
MinnesotaMinnesota tax relief
MississippiMississippi taxes
MissouriMissouri tax relief
MontanaMontana taxes
NebraskaNebraska taxes
NevadaNo state income tax
New HampshireNo state income tax on wages and salary
New JerseyNew Jersey taxes
New MexicoNew Mexico taxes
New YorkNew York tax relief
North CarolinaNorth Carolina tax relief
North DakotaNorth Dakota taxes
OhioOhio tax relief
OklahomaOklahoma taxes
OregonOregon tax relief
PennsylvaniaPennsylvania tax relief
Rhode IslandRhode Island taxes
South CarolinaSouth Carolina taxes
South DakotaNo state income tax
TennesseeNo state income tax
TexasNo state income tax
UtahUtah tax relief
VermontVermont taxes
VirginiaVirginia tax relief
WashingtonNo state income tax
Washington, D.C.West Virginia tax relief
West VirginiaWashington, D.C. taxes
WisconsinWisconsin tax relief
WyomingNo state income tax

What do tax debt forgiveness forms look like?

CNC requests and offer in compromise applications share some forms, but the innocent spouse relief form is separate. You can fill out the application yourself, but you’re better off working with an accountant or tax attorney, as 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 compromise process. For an offer in compromise, you’ll fill out Form 656 booklet, which contains Forms 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 info, 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 a peek at what it looks like:

Screenshot of Form 656

“Tax debt forgiveness applications and forms can be handled on your own as the taxpayer, says Jim McCarthy, CFP. “But getting a tax professional likely reduces errors.”

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 there are both pros and cons to weigh.

Pros

  • Get immediate relief

    You can either settle for a lower amount you can manage (offer in compromise) or buy some 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 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.

  • A lot of 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 simply not be your best path forward. Consider these alternatives for seeking tax debt forgiveness:

Installment plan with the IRS

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

  • Short-term payment plans: You don’t need to apply for a formal payment plan; instead, you have up to 180 days to pay your full tax debt, but know that your account will accrue interest and penalties during this time period.
  • Long-term payment plans: This is the IRS’s more formalized installment agreement—when you need more than 180 days to pay your debt. You’ll have to 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

Filing for Chapter 13 bankruptcy is an option if you suffer severe financial hardship and cannot pay your back taxes. Filing for bankruptcy involves a lot of complicated processes and can have major ramifications on your life over the next several years.

Consult with a bankruptcy attorney before making such a consequential decision.

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 have to pay taxes on the amount of money by which your current tax debt is reduced.

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 really confusing. You might improve your chances of qualifying if you work with a progressional.

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.