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An Overview of IRS Tax Debt Forgiveness Programs

Did you know that the IRS has estimated that around a million Americans owe over $83 billion in unpaid taxes, penalties and interest? Now, the next question: If so many people owe money in back taxes, how is the IRS ever going to collect it from all those taxpayers? The truth is that the IRS cannot collect all those back taxes – and it is for this exact reason that they created the debt forgiveness programs. This article will explain what those programs are and the three main factors that oblige the IRS to forgive all or part of your existing tax debts.

What can make the IRS forgive your tax debts?

Statute of Limitations on IRS collection actions: Did you know that the IRS generally has only ten years to collect tax debts, after which they can no longer legally collect them from you? This method might sound great to long-suffering taxpayers. Basically, if the IRS can recover only X dollars as back taxes within that 10-year period, what if X+ 1 dollars are offered by you? How good is that deal for the IRS? And how is it for you?

Chapter 7 Bankruptcy: Most of the time, Chapter 7 bankruptcy can completely wipe out (discharge) the personal tax debts you owe. This means that the IRS won’t get anything for what could be several hundreds of thousands of dollars in back taxes. A bankruptcy can provide instant IRS debt relief.

Reasonable Collection Potential: If you don’t have any money to pay, would any kind of collection action benefit the IRS? You might owe hundreds or even thousands of dollars to the IRS, but so what? How about owing million dollars? There is no big difference if you don’t have any assets or money to pay. This is what the IRS terms as “Reasonable Collection Potential” (RCP) – an estimation of your worth. If your RCP is $0, and you don’t have any assets worth going after or you’re completely broke, then the IRS won’t be able to take anything from you.

IRS Tax Forgiveness

To summarize, choosing the right debt forgiveness program depends on the three factors mentioned above: 1) How much time the IRS have to collect; 2) how much money the IRS can collect; and 3) whether you can use bankruptcy to your benefit. Now, let’s discuss the various IRS tax debt forgiveness programs available.

IRS Uncollectible Status

If you are unemployed or on low income and if you have little to no assets or equity to repay the tax debt, you may be accorded the “Currently Not Collectible” status. CNC means that the IRS will stop any collection action and you don’t have to make any repayment until your situation improves, aside from addressing any ongoing underpayment situation. This status runs the clock, meaning that if you remain in CNC until the statute of limitations expires, your back taxes will no longer be owed to the IRS.

IRS Partial Payment Installment Agreements

If your RCP is very high for non-collectible status, then you qualify for the next-best solution – a Partial Payment Installment Agreement. Here, instead of nothing, you pay fractional monthly amounts to the IRS. Now, these fractional amounts won’t help in paying off your entire tax debt before the collection statute expires. And, similar to CNC, if the statute of limitations runs out, so does your obligation to pay the back tax debt.

Doubt as to Collectability Offer in Compromise

Three types of Offer in Compromise exist, but Doubt as to Collectability offers are the most common type used for tax debt forgiveness. The other two types of OICs are hardly ever used. This is based upon on your ability to pay the IRS, balanced against the IRS’s ability to collect. This is the main reason behind the request for several Offers in Compromise, whereby the negotiated amount can be paid in monthly installments.

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