I owe the IRS $18k. Can it be forgiven?

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Q. After making some mistakes on my tax return, I’ve learned I owe about $18,000 in back taxes. I contacted the IRS and they only helped by arranging a payment plan. Can this IRS debt be forgiven?
— Needing help

A. It’s rough to have an IRS debt hanging over your head.

You’re certainly not alone.

It’s estimated that every year at least five million individuals are unable to pay their taxes in full by April 15, said Jonathan Donenfeld, a certified public accountant with JLD Tax & Accounting in Jersey City.

He said if you call the IRS on the phone, representatives normally only suggest a payment plan for an amount you may not be comfortable paying.

“As a taxpayer you have other options, and depending on your situation, you may be able to settle your tax debt for less than you owe, sometimes significantly,” Donenfeld said. “It’s important to act fast, though, because if you owe the IRS money, they can quickly move your account to collections and start issuing wage garnishments or bank levies so you want make sure you are protected.”

One option could be a First-Time Penalty Abatement.

Donenfeld said you may qualify for relief from penalties for failing to file a tax return, paying on time, and/or failing to deposit taxes when due under the IRS First Time Penalty Abatement.

You may qualify if:

  • You didn’t previously have to file a return or you have no penalties for the three tax years prior to the tax year in which you received a penalty.
  • You filed all currently required returns or filed an extension of time to file.
  • You have paid, or arranged to pay, any tax due.

There are other penalty abatement options.

“For example, if you took an early withdrawal from a 401(k) plan and your unreimbursed medical expenses exceed 10% of your income, you may qualify for a penalty abatement of the 10% early withdrawal penalty,” he said.

Then there’s an Offer in Compromise (OIC).

An OIC allows taxpayers to settle their IRS tax debt for less than the full amount of what they owe, sometimes for pennies on the dollar.

“To qualify, the taxpayer must prove to the IRS that they can’t pay the IRS back in full within the collection’s statute expiration date,” he said. “This is called Doubt as to Collectability.”

When considering a taxpayer’s OIC, the IRS will look at the taxpayer’s income, expenses, liabilities and value of the taxpayer’s assets when determining if they can pay, Donenfeld said.

Taxpayers must also be current with their tax filing and cannot be in an open bankruptcy proceeding, he said.

There’s also something called a Partial Payment Installment Agreement (PPIA).

“The PPIA is similar to a regular installment agreement where you make monthly payments to the IRS for taxes owed,” he said. “However, the big difference is you are only paying back part of the taxes you owe.”

To apply, you must submit a full financial disclosure (Form 433-A). It includes details about your income, assets, debts and expenses. Like an Offer in Compromise, the IRS takes into account your ability to pay, he said.

“Partial Payment Installment Agreements are harder to get than other types of installment agreements,” he said. “However, they are easier to obtain than an Offer in Compromise. If the IRS has recently rejected an Offer in Compromise, you may want to apply for this instead.”

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This story was originally published on Feb. 6, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.