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Are you in hot water with the IRS? It’s a difficult place to be in. “Tax debt” can feel like a big, dark cloud that follows you, no matter where you go. It can destroy your credit score, ruin your chances of qualifying for loans or a home mortgage, and cause tension in your relationships.
Perhaps the most ironic thing about debt is that it can feel almost impossible to get on top of. After all, chances are that you were hit with an IRS penalty because you didn’t have enough money to pay off your taxes to begin with. Now, you still owe all of the money back—and more. The longer you stay in debt with the IRS, the more interest you amass. And so, your debt can grow, sometimes so large that it may feel impossible to ever repay. You may often find yourself thinking, “Can’t the IRS forgive me, just this one time?”
Good news: that’s exactly what they can do! The IRS offers one-time debt forgiveness to first-time offenders via penalty abatement, and a number of other programs to those with surmounting tax debt, under the umbrella of the IRS Fresh Start Initiative. While these options aren’t available to just anyone, they are truly a lifesaver for those who do qualify.
To learn more about your options when it comes to IRS one-time forgiveness and tax debt, read on. Or, use the links below to jump ahead to a section of your choosing.
What is One-Time Debt Forgiveness?
IRS first-time penalty abatement, otherwise known as one-time debt forgiveness, is a long-standing IRS program. It offers amnesty to taxpayers who, although otherwise textbook taxpayers, have made an error in their tax filing or payment and are now subject to significant penalties or fines.
The IRS penalty abatement program was born from a need for a clear and consistent approach to administration of the three main categories of IRS penalties: issues with filing, issues with payment, and issues with reporting accuracy. In the late 1980s, the IRS performed a significant study of civil IRS tax penalties to analyze inconsistencies and make recommendations on how to eliminate them. Through this study, the IRS decided that they needed to allow ample opportunity for taxpayers who have made a poor decision to correct their mistake.
In order to meet this need, the IRS introduced the First Time Abate (FTA) waiver in 2001. This waiver gave taxpayers facing a first-time penalty the ability to apply for penalty abatement.
How to Qualify for IRS One-Time Forgiveness
In order to qualify for IRS one-time forgiveness, a taxpayer must have a clear record of timely and accurate tax filing. This program is not available to those who are notoriously late on filing taxes, or have multiple penalties already in existence. It is for taxpayers facing a first-time penalty for whom it’s reasonable to believe that the cause for the penalty was made in error, as they have no history of red flags in their taxes. An individual taxpayer must apply for IRS one-time forgiveness via penalty abatement within one year of being charged with their penalty, while a business taxpayer must apply within one quarter.
IRS one-time forgiveness via first-time penalty abatement is available to those who are facing the following penalties.
Failure-to-pay Penalty
If a taxpayer does not pay their taxes by the federal tax deadline of April 15th, or an extended deadline if they’ve applied and qualified for an extension, they will be charged with a failure-to-pay penalty.
All IRS penalties are calculated using a percentage of your total tax owed. A failure-to-pay penalty accrues at a rate of 0.5% of the late payment amount per month that it is late. Ultimately, a failure-to-pay penalty caps out after 50 months at 25% of the owed tax amount.
For example, let’s say Jack owes $1,000 on his taxes and he doesn’t pay them. He will accrue a failure-to-pay penalty at a rate of $5 per month ($1,000 owed x 0.5% penalty), ultimately capping out at 50 months and $250 dollars owed ($5 per month x 50 months).
Failure-to-file Penalty
A taxpayer is charged with a failure-to-file penalty if they filed their taxes after the due date. This may either be the federal tax deadline, April 15th, or an extended tax deadline.
A failure-to-file penalty consists of both a penalty for late filing and a penalty for late payment. It accrues at a rate of 4.5% per month filed late, and 0.5% per month paid late. Both percentages max out at 25%, 5 months for late filing and 50 months for late payment. That makes the maximum total penalty 47.5%.
Let’s look at an example. Jack owes $1,000 on his taxes this year. He doesn’t file or pay any of his taxes. His late filing penalty accrues at $45 each month ($1,000 owed X 4.5% penalty) and his late payment penalty accrues at $5 each month ($1,000 owed x 0.5% penalty), totalling $50 each month. His late filing penalty caps after 5 months at $225 owed ($45 per month x 5 months), and his late payment penalty caps after 50 months at $250 owed ($5 per month x 50 months). When all is said and done, Jack owes $475 in penalties on his $1,000 tax return.
Failure-to-deposit Penalty
All business owners are required to withhold taxes from their W-2 employees’ paychecks and then deposit those taxes on a monthly or semi-weekly schedule. If they fail to do so by their regular due date, they will be charged with a failure-to-deposit penalty.
A failure-to-deposit penalty is charged at the following rates:
- 1-5 days late: 2% of amount owed
- 6-15 days late: 5% of amount owed
- 15+ days late: 10% of amount owed.
If the IRS has not received payment in a timely manner, they will send a notice requesting payment. If the business owner pays within 10 days of receiving the notice, they will incur a 10% penalty. If they don’t pay within 10 days, they will incur a 15% penalty.
How to Apply for IRS One-Time Forgiveness
When it comes to IRS penalty abatement, it’s best to work with a tax professional. Not only are they well versed in penalty abatement guidelines, but they also likely have thorough experience in composing penalty abatement requests. One of the more complicated things about penalty abatement is that, while there are requirements to qualify, there are no hard and fast rules as to whether or not someone should be approved. It’s entirely up to the IRS representative with whom you are discussing the possibility of abatement.
There are a few different ways to apply for penalty abatement from the IRS. While most transactions with the IRS require the completion of a form, penalty abatement can also be done through a written petition or verbally, in a conversation with a qualified IRS representative.
Requesting First-Time Penalty Abatement via Written Letter
If you’d like to request first-time penalty abatement via a written letter, you or your tax practitioner should draft a formal letter to the IRS. In this request, you can provide information about your penalty and the circumstances of your penalty.
The IRS has a list of penalty relief arguments that qualify a person for all types of penalty abatement, not just first time. Those include:
- IRS errors or delays: The IRS has made a mistake or has been delayed in their interactions with you, and that is what has caused the penalty
- Erroneous written information: The IRS has provided you with incorrect information that has led to your penalty
- Reasonable cause: There has been an unavoidable circumstance in your life that has made it impossible for you to file or pay in a timely manner and has thus led to your penalty. That may include:
- A death in the family
- A disaster such as a fire or flood that has destroyed your records
- You were in jail or rehab when your taxes were due
- There was a civil disturbance like a mail strike that prevented your taxes from arriving on time
- You were misled by a tax professional
If you qualify for any of these circumstances in addition to a first time penalty abatement, be sure to reference them in your letter. They will help your penalty abatement case.
Requesting First-Time Penalty Abatement via Official Form
If you’d rather use an official IRS form to request penalty abatement, you or your tax practitioner will need to complete IRS Form 843, Claim for Refund and Request for Abatement. As with all IRS forms, you’ll need to provide your personal information, such as your address and SSN, as well as details about your specific penalty. At the bottom of the form, there’s room for you to provide a detailed explanation as to why you should qualify for abatement. You can include any of the above information that you may put in a written letter.
Requesting First-Time Penalty Abatement Verbally
If you’re already in conversation with an IRS representative, it can sometimes be easiest to simply request penalty abatement over the phone or in person at a Tax Administration Center. You may be asked to send in documentation that supports your claim.
Additional Tax Debt Forgiveness and Relief Options
If you don’t qualify for first-time penalty abatement, you’re not out of luck. The IRS offers a number of other options for taxpayers who are seeking tax relief. These options fall under the umbrella of the IRS Fresh Start Program.
IRS Fresh Start Program
Introduced in 2011, the IRS Fresh Start Program was an initiative launched to help indebted taxpayers and small business owners get out from under their tax debt. While tax relief options were available prior to the launch of the Fresh Start Program, the program made a number of changes to make tax relief options more accessible to those who really needed help. Those options include IRS installment agreements, an Offer in Compromise, and non-collectible status.
IRS Installment Agreement
If you owe the IRS a considerable amount of money in tax debt, interest, and penalties, an IRS Installment Agreement is typically the first plan of action that you’ll take. An Installment agreement is like a payment plan with the IRS. It allows you to pay back your debt incrementally over an extended period of time. Additionally, as long as you are partaking in an IRS payment plan, you will be shielded from tax levies or liens.
Depending on your tax debt, you may either choose to do a short-term payment plan or a long-term payment plan. A short-term payment plan allows you to pay your tax debt owed over the course of 120 days. It is free to set up. A long-term payment plan allows you to pay your tax debt owed over between 121 days and 3 years. It costs between $31 and $225 to set up, depending on your circumstances, but this fee is often partially waived for low income taxpayers. You will continue to accrue penalties and fees while on an installment plan, so it’s in your best interest to pay back your tax debt as rapidly as possible.
Qualifying for in IRS installment agreement is fairly simple. If you owe $10,000 or less, the IRS will automatically approve your request for an installment plan, as long as you:
- Agree to pay off your debt in 3 years
- Haven’t missed a filing or payment deadline in the past 5 years
- Agree to meet all deadlines in future tax years
- Don’t have an open bankruptcy preceding
If you owe $50,000 or less, you can still apply for a long-term installment agreement from the IRS. If you owe more than $50,000 but under $100,000, you can apply for a short-term payment plan.
To apply for an IRS Installment Agreement, you’ll need to complete IRS Form 433-D.
IRS Partial Payment Installment Agreement
If you can’t afford to pay back the entirety of your debt over the course of three years, you may not need to with a Partial Payment Installment Agreement. This program allows you to subtract the cost of your basic living expenses from your tax debt and only pay the difference. A partial payment installment agreement does not protect you from federal tax liens.
In order to qualify, you must:
- Owe at least $10,000
- Have limited assets and fairly little disposable income, if any
- Have no outstanding tax returns or bankruptcies
You’ll need to show proof of your assets and income in order to qualify, and your case will be reviewed every two years to see if you can raise your payment amount.
To qualify for a partial payment installment agreement, you’ll need to complete IRS Form 433-D, as well as IRS form 9465.
Offer in Compromise
An IRS Offer in Compromise is the last resort solution for those who cannot afford their tax debt, but a lifesaver for those who qualify. An Offer in Compromise allows you to negotiate with the IRS to settle your tax debt for less than what you actually owe. Once you’ve paid off the negotiated amount, you will be back in the IRS’ good standing, even if it’s considerably less than your original tax debt.
In order to qualify for an IRS Offer in Compromise, you need to meet one of the following conditions:
- There is reason to believe that the IRS miscalculated the amount of tax debt that you owe
- There is reason to believe that the debt is collectible, meaning that you cannot and never will be able to pay back the debt
- Paying back the dead would cause “economic hardship”, meaning that paying it back would prevent you from paying for your basic needs
Calculating an Offer in Compromise can be a bit tricky. First, you’ll need to complete IRS Form 433-A, to provide extremely detailed information about your income, assets, household income, and expenses. At the bottom, you’ll use the information above to calculate your minimum possible offer. This eliminates any opportunity for you to low-ball the IRS, as it must be based on your disposable income. Along with your form, you’ll need to provide copies of many different income statements, bank statements, loan statements, and more.
If you’re looking for tax relief, it’s best to do so with the help of a tax professional. They have the experience and education to find you the best solution to settle your tax debt and get you back in good standing with the IRS. Contact us today to learn about your options.
