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Can Tax Debt Be Written Off?

Tax debt may be written off or discharged through a process known as “tax debt forgiveness” or “tax debt relief.” This typically occurs when a taxpayer is unable to pay the full amount owed and meets certain criteria set by the tax authority (state or federal). Generally, the IRS will consider writing off tax debt if there is evidence of financial hardship, or if it believes that collecting the debt in full is unlikely. Here are some of the most common scenarios when tax debt may be written off.    

Scenarios Where Federal Tax Debt May Be Written Off or Forgiven

The Internal Revenue Service (IRS) may forgive or provide relief for tax debt under certain circumstances, including:

Doubt as to Collectibility

“Doubt as to Collectibility” is a term used by the IRS to describe a situation where a taxpayer is unable to pay the full amount of their tax debt. When a taxpayer demonstrates that they are facing financial hardship or that it would be impossible for them to pay the full amount owed, the IRS may accept an Offer in Compromise (OIC) based on doubt as to collectibility.

What is an Offer in Compromise?

An Offer in Compromise is an agreement between you and the IRS that allows you to settle your tax debt for less than the full amount. To qualify for an OIC based on doubt as to collectibility, you must demonstrate to the IRS that you do not have the financial means to pay the full tax debt within a reasonable period of time.

When considering an OIC based on doubt as to collectibility, the IRS evaluates various factors including:

  • Income: The IRS will assess your current income and future earning potential, taking into account factors such as job stability, income sources, and earning capacity.
  • Expenses: Your necessary living expenses, such as housing, utilities, transportation, and healthcare, will be considered to determine your ability to pay.
  • Assets: The IRS will evaluate your assets, including real estate, vehicles, investments, and other valuable possessions that could be liquidated to pay off the tax debt.
  • Future Income Potential: If the IRS determines that your future income potential is significant, it may affect their decision on the amount they are willing to accept through the OIC.

The OIC process can be complex, and the IRS has specific guidelines and formulas for calculating an acceptable offer amount. We recommend seeking the assistance of a qualified tax professional or tax attorney. They have experience in negotiating with the IRS and can help prepare and submit an Offer in Compromise based on doubt as to collectibility.

Effective Tax Administration

Effective Tax Administration is a basis for seeking relief from tax debt when you have the ability to pay but doing so would cause an undue economic hardship. This situation often arises when there are exceptional circumstances, such as severe illness, significant medical expenses, or other factors that make full payment of the tax debt unfair.

To qualify for ETA relief, you must demonstrate that paying the full amount would create an economic hardship or would be inequitable. The IRS will consider your unique circumstances and evaluate whether it is appropriate to provide relief in the form of reduced or forgiven tax debt.

Innocent Spouse Relief

If you filed a joint tax return with your spouse, and the tax debt is a result of your spouse’s erroneous reporting or underpayment, you may qualify for innocent spouse relief. This relieves you of the responsibility for the tax debt.

Statute of Limitations

The IRS has a limited time frame, generally ten years, to collect tax debt. Once the statute of limitations expires, the tax debt is considered uncollectible, and the IRS will no longer actively pursue it. It’s important to note, however, that the statute of limitations does not erase the tax debt and the IRS may still apply any tax refunds or future credits toward the debt.

Will a Bankruptcy Erase Tax Debt?

Under certain circumstances, tax debt may be discharged through bankruptcy proceedings. Not all tax debts are eligible for discharge, however, and the rules regarding tax debt and bankruptcy can be complex. Consulting with a qualified bankruptcy attorney is crucial to understanding the specific implications of your situation.

Final Thoughts

It’s crucial to understand that tax debt forgiveness is not automatic. Each case is assessed individually by the IRS. We recommend consulting with a tax professional or seeking assistance from a qualified tax attorney. A tax professional can review your specific circumstances and explore the available options for tax debt relief.

For a free tax consultation and quote, call Tax Defense Network at 855-476-6920 today!