Not everybody who defaults on their tax payments is a fraud. Sometimes, one may have genuine reasons for being unable to pay their dues. The IRS recognizes these situations and offers several tax debt relief programs to alleviate one’s financial burden. Each program has different eligibility requirements, benefits, and terms and conditions. That’s why one should compare the options before applying. If the process seems complicated, one can hire licensed professionals for help with tax debt solutions.

Offer In Compromise (OIC)

An OIC allows one to settle their federal tax debt for less than the full amount they owe. This option is activated only when one cannot pay their due tax amount in full or if full payment can cause them financial hardship.

Before approving one’s OIC application, the IRS closely assesses one’s ability to pay, income, expenses, and asset equity. Based on this information, the agency decides whether the reduced amount one proposes to pay is the maximum they can afford without causing financial hardship.

To apply for OIC, one must submit the required forms (such as Form 656 and Form 433), pay a $205 application fee, and make an initial payment. A low-income taxpayer may qualify for a waiver on the initial payment. If the IRS does not decide on one’s OIC within two years of receipt, the offer is automatically accepted.

Before submitting a formal application, one can check their eligibility and receive a preliminary offer using the Offer in Compromise Pre-Qualifier Tool or their online account.

Currently Not Collectible (CNC)

This tax debt settlement program is for one who owes taxes but cannot clear them without using money set aside for basic living expenses. If one falls under this category, the IRS temporarily stops collecting their tax debt, including levies and wage garnishments, and their account remains in CNC status.

Unlike an OIC, CNC doesn’t make one’s tax debt go away completely or even partially. Penalties and interest continue to accrue. Meanwhile, the IRS periodically reviews one’s financial situation and may resume collection later when one is more financially stable. However, if the financial situation doesn’t improve before the statutory 10-year mark, the debt may expire. 

To qualify for the CNC program, one must file required returns and provide financial information on income, expenses, and assets.

Installment Agreements

Instead of waiving off tax debts or temporarily designating one’s status as currently unpayable, the IRS may sometimes offer ways to make it easier for one to clear their dues. IRS Installment Agreements are monthly payment plans that allow one to pay their federal tax debt over time when they cannot afford a lump-sum payment.

Installment Agreements are especially useful for one who doesn’t qualify for OIC and CNC. There are multiple types of agreements:

• Guaranteed : For one who owes ≤ $10,000
• Streamlined: For one who owes ≤ $50,000,
• In-Business Trust Fund Express: For small businesses that owe ≤ $25,000
• Partial Payment: For one who can only settle a part of their tax debt
• Non-Streamlined: For complicated scenarios

To qualify for Installment Agreements, one must be current on tax filings and agree to IRS terms. Interest and penalties continue to accrue while payments are made.

Innocent spouse relief

This scheme can help one avoid paying additional taxes if one’s spouse understated taxes on their joint return and was unaware of the errors.

Innocent spouse relief is only for taxes due on the spouse’s income from employment or self-employment. One cannot claim relief for taxes due on:

• Their own income
• Household employment taxes
• Individual Shared Responsibility payments
• Business taxes
• Trust fund recovery penalties for employment taxes

One can request innocent spouse relief if:

• They filed a joint return with their spouse
• Their taxes were understated due to errors on their return
• They were unaware of the errors
• They live in a community property state

Errors that cause understated taxes include:

• Unreported income
• Incorrect deductions or credits
• Incorrect values given for assets

Another IRS tax relief option to resolve tax debt legally is the IRS First-Time Penalty Abatement (FTA) and Relief program.