The IRS forgives the tax debt partially or fully for taxpayers that have limited or no ability to pay. Some individuals of limited means qualify for IRS reduction plans. Full tax debt forgiveness occurs when the statute of limitations expires before the IRS can collect the amount owed.
To achieve tax debt reduction, taxpayers may request an Offer in Compromise (OIC) or Partial Payment Installment Agreement. Both of these IRS payment plans allow for tax debt reduction for individuals that are experiencing significant financial difficulty. According to the IRS, you may be qualified if you can only meet basic necessities such as food, shelter, transportation, medical expenses, etc.
When considering an application for OIC, the IRS reviews the taxpayer’s assets and the right to ownership along with income from all sources. If a levy can satisfy the tax debt without forcing the taxpayer into a financial crisis, they may ultimately take that step.
To more effectively assist taxpayers, the IRS introduced the Fresh Start program. Now, taxpayers who are financially distressed may qualify for OIC with new considerations for things such as living expenses and the presence of student loans. Under the Fresh Start OIC, the IRS reviews the taxpayer’s future income for one year (instead of the previous four) for resolution that takes five or fewer months. For resolutions that take six to 24 months, the IRS reviews two years’ future income (instead of the previous five).
In order to qualify for an OIC, taxpayers must demonstrate that they are unable to pay the debt without facing a financial hardship. If the IRS determines that an individual does not qualify after reviewing all income sources, a reduction will not be approved.