When Does the IRS Forgive Back Taxes? A Complete Guide

If you owe the Internal Revenue Service (IRS) money in the form of unpaid taxes, the agency may forgive the debt once the 10-year statute of limitation passes. However, “tax forgiveness” has many meanings, depending on who is using the term, and it often refers to an IRS program with a different name.

In this post, we at the tax resolution law firm of Damien’s Law, discuss tax forgiveness and your options to resolve an IRS liability. To get help now, contact us today for a free consultation.

Does the IRS Ever Forgive Back Taxes? 

What is IRS forgiveness? Generally, tax forgiveness is reducing or eliminating back tax debt through one of the IRS’s programs for taxpayers struggling to meet their obligations.

IRS forgiveness may also refer to penalty relief. 

If you qualify, IRS forgiveness options may reduce your tax liability significantly and help you avoid the IRS’s intrusive collection process. The sections below unpack the different aspects relating to back tax forgiveness and how they may apply to your situation.

The Collection Statute Expiration Date (CSED)

Generally, the IRS has a window of 10 years from the assessment date to collect your tax balance. The Collection Statute Expiration Date (CSED) marks the end of the collection period when the IRS is no longer able to collect and effectively the tax gets forgiven.

Some tax assessments that have their own CSEDs include:

• An original assessment from a return you filed voluntarily.
• An assessment resulting from an amended return filing.
• A Substitute for Return assessment.
• A civil penalty assessment.
• An audit assessment.

Note that the IRS can suspend (pause) or extend the collection period under specific circumstances, delaying the CSED. For example, a CSED suspension occurs while the IRS reviews an installation agreement request or an offer in compromise application.

Currently Not Collectible (CNC) Status

The CSED may also become relevant if the IRS places your account in currently-not-collectible status. Policy Statement 5-71 states that a financial hardship exists when a levy action by the IRS prevents taxpayers from meeting their basic living expenses. You have a financial hardship if the IRS’s Collection Financial Standards equal or exceed your income.

For example, suppose Taxpayer A’s income is not enough to cover back tax payments and their family’s living expenses, such as rent, food, and medical treatments. In this example, the IRS will report the account as currently not collectible and delay collection efforts until A’s financial situation improves. However, if the collection statute expires while the account is non-collectible, the tax debt will effectively expire or be forgiven.

In other words, CNC status does not equate to tax forgiveness, but often, being in this status can lead to tax forgiveness. 

Partial Payment Installment Agreement (PPIA) 

An installment agreement is among the most effective forms of tax debt resolution and involves paying down your liability over time while the IRS suspends collection activities. However, while paying down your tax debt, penalties, and interest will continue to accrue, and the IRS may file a Notice of Federal Tax Lien. Additionally, the IRS can apply any federal refunds to offset your balance.

Various installment agreements are available to taxpayers. These plans include guaranteed, streamlined, and non-streamlined agreements. With all of these plans, you pay your full tax liability over time. However, there is one type of payment plan where you make payments on a settlement, and that’s called a partial payment installment agreement (PPIA).

If you qualify for a PPIA, the IRS will let you make a monthly payment you can afford. Once the collection period expires, the agreement ends, and the IRS forgives the unpaid portion of your tax debt. You will need to provide detailed financial information to qualify for this type of payment plan.

First-Time Abatement (FTA)

A first-time penalty abatement is a form of partial IRS forgiveness. This relief involves the removal of failure-to-pay, failure-to-file, or failure-to-deposit penalties from your tax balance.

You will typically only qualify for a first-time penalty abatement if you:

• Paid or arranged to pay your tax liability
• Have a history of good compliance with no penalty assessments during the past three years
• Have filed all currently-due returns on time or received an extension

Sometimes, taxpayers qualify for penalty abatement, even if they do not meet the above requirements. Penalty relief for reasonable cause is available if you can prove that you had a good reason for not filing on time. Examples of reasonable grounds include hospitalization, imprisonment, or the loss of your financial records during a disaster.

Offer in Compromise to Get Taxes Forgiven

An offer in compromise (OIC) is a settlement agreement that involves paying only a portion of your tax liability. The IRS forgives the remainder of the debt upon acceptance of the offer.

You are eligible to apply for an OIC if you are: 

• Current and compliant
• Not subject to an open bankruptcy proceeding
• An employer who made a tax deposit for the current and past two quarters

Note: If you are applying for the current year, you must have a valid current-year return extension or your return must be filed. As a rule, the IRS will only approve an OIC if the offer amount represents the maximum amount the agency can reasonably expect to collect before the CSED. When evaluating your offer, the IRS will consider the following:

• The amount you owe in back taxes, penalties, and interest
• Your annual income and the amount you can contribute to your tax debt
• Your net realizable equity in any assets

In most cases, taxpayers submit offers in compromise because the value of their income and assets are lower than the amount they owe in back taxes (doubt as to collectibility). However, there are also offer-in-compromise programs available for people who doubt their tax liability and for effective tax administration, and qualifying taxpayers can also get tax forgiveness through these programs. 

Frequently Asked Questions

Does the IRS have a forgiveness program?

The IRS has no tax relief option called a “forgiveness program.” When tax professionals or other parties talk about tax forgiveness programs, they typically refer to tax resolution solutions such as:

• An offer in compromise
• A partial payment installment agreement
• Currently not collectible status
• A penalty abatement

The IRS’s Fresh Start Initiative Reforms that made it easier for taxpayers to pay their back taxes also fall under “forgiveness programs.” Note that the Fresh Start is also not an IRS program. It’s a collection of reforms designed to help taxpayers with tax debts, and it was implemented over 10 years ago.

What do tax relief companies mean when using the term “IRS one-time forgiveness”? 

If your online searches indicate that you owe back taxes, you will likely encounter advertisements by tax resolution companies. These businesses may promise to significantly reduce or eliminate your balance under a one-time forgiveness option for “pennies on the dollar.”

In reality, the IRS has no one-time forgiveness program. These companies use the phrase as a marketing hook. The option that these tax resolution companies refer to is a first-time penalty abatement. 

Why should I avoid companies selling on the promise of “tax forgiveness”? 

When a company promises to apply for a tax forgiveness program on your behalf in exchange for an upfront or monthly maintenance fee, proceed with caution. These fees can amount to thousands of dollars, increasing taxpayers’ debt.

These companies are easy to spot, as they tend to make bold claims. For example, they may promise to stop the IRS from taking collection action against you. 

Marketers may tell you that you qualify for a hardship program even though they have no insight into your financial situation and compliance history. Also, even if they did have this information, only the IRS can decide if you qualify for a tax relief program. 

Is it possible to dodge the IRS until the CSED expires?

Once taxpayers learn that the collection period expires after ten years, they often think that the best course of action is to do nothing and wait out this period. However, as a powerful government agency, the IRS is unlikely to leave you be. 

If the IRS receives no response to the Notice and Demand for Payment, they may file a Notice of Federal Tax Lien, a public record of the government’s claim against your property. In other words, if you decide to sell a property, the government will be the first to claim the proceeds. 

The IRS also has the power to collect your tax debt by seizing the money in your bank account or garnishing your wages. As a result, avoiding the IRS is a challenging task. Collection action may leave you in financial hardship, avoidable through one of the IRS’s tax resolution options.

Get Professional Help in Dealing With IRS Back Tax Debt 

Pursuing an IRS forgiveness program can help you resolve your tax debt and ensure financial stability. At Damien’s Law, our IRS tax attorney can assess your tax situation and provide a favorable legal resolution to settle your debt as quickly as possible. If you received a notice from the IRS, schedule a consultation with us to learn more about your options.