You may have seen the ads, “The IRS writes off millions in tax debt every year!” If you’re struggling with tax debt, these ads may be of particular interest. However, they’re not quite what they seem. Unfortunately, these types of ads are often used by unscrupulous tax relief companies to draw in clients.
What’s the truth? Well, there are certainly cases where the IRS will settle or write off unpaid taxes, but not everyone qualifies. In this article, we bust the myths surrounding IRS tax write-offs and detail real tax resolution options you can consider, such as an offer in compromise or letting the tax collection statute of limitations expire. If you’d like to get started, call Damiens Law at 601-873-6510 for a free consultation or schedule a consultation online.
Key Takeaways
- No special limited-time “write off” program – Be wary of companies promoting “special programs” or “limited-time applications.”
- Offer in compromise – An Offer in Compromise (OIC) allows you to repay less than your full debt if you qualify.
- Collection Statute Expiration Date (CSED) – Ten years after the IRS assesses your tax debt, the IRS must stop trying to collect that tax debt.
- Form 1099-C – The IRS doesn’t issue Form 1099-C for tax debt. This form can only be issued by creditors when canceling consumer debt of $600 or more.
- Work with a tax professional – Working with a qualified tax expert is the best way to find the right tax settlement option.
Tax Debt Doesn’t Get Written Off Automatically
It’s technically true that the IRS wipes some debts, but this isn’t an act of forgiveness or something that happens automatically. Tax “write-offs” mainly happen in the following scenarios:
- The Collection Statute Expiration Date (CSED) runs out: The CSED means that the IRS has 10 years from the date it assesses a tax to collect that tax.
- The IRS settles debt through an Offer in Compromise (OIC): In certain cases, you can negotiate an Offer in Compromise (OIC), which allows you to pay back less debt than you owe.
Understanding the above options could be the key to unlocking your tax debt. If you’ve been feeling overwhelmed by the amount that you owe, avoid promises that seem too good to be true. Instead, look into these two avenues and see which one suits your situation.
CSED Expiration: What Happens When Time Runs Out
The IRS has a strict deadline to collect any taxes you owe. When the agency has conducted its assessment, it have 10 years from that date to collect your debt. When the time is up, the tax debt that you owe is wiped from your account, and you don’t have to pay it.
This 10-year “clock” doesn’t always run continuously. There are events that can pause (or toll) the clock and add extra time to this period. These include the following:
- You lived outside the US: If you’ve been living in a different country for six months or more, that time will not count towards the deadline. For example, if you move away for a year and return, the CSED period will pause when you leave and restart when you return.
- You filed for bankruptcy: While you’re in the process of filing for bankruptcy, the time will pause until the bankruptcy is resolved, plus an additional six months after that.
- You have requested a formal hearing: If you request a Collection Due Process hearing to fight a lien or a levy, this also pauses the CSED clock.
- You’ve made an OIC submission: When submitting an OIC, you effectively pause the CSED period while the IRS reviews your case, plus 30 days.
- You’ve made an installment agreement request: Requesting to repay your taxes in installments may be a smart way of clearing your debt. However, the CSED period gets extended while the IRS makes a decision on your proposal.
The above scenarios can add months (or even years) to the CSED period. That means that the IRS may have much longer than the initial 10 years to collect your taxes. By working with a qualified tax attorney, you can figure out exactly how much time the IRS has left to collect a tax debt from you.
The CSED and Currently Not Collectible (CNC) Status
Currently Not Collectible (CNC) status entirely stops any IRS collection action, although it doesn’t stop the CSED clock. If you’re nearing the end of your CSED period, you may be able to use the CNC status strategically to outrun the clock and have your tax debt written off.
However, applying for the CNC status can be challenging. Reaching out to an experienced tax attorney gives you the best chance of success.
The CSED and Partial Payment Installment Agreements (PPIA)
Partial Payment Installment Agreements (PPIA) allow you to pay off your tax debt over time. If you don’t have the funds to cover your debt up front, this option can give you some much-needed relief. Much like the CNC status, this doesn’t pause the CSED period.
If you have a PPIA and you’re paying small installments when you reach the CSED deadline, the remaining tax debt will be wiped. In real terms, that means that you don’t end up paying off the entirety of your debt. The IRS accepts these agreements, understanding that since they’d rather get something than nothing.
Offer in Compromise (OIC): Negotiating a Settlement
You may be eligible for an Offer In Compromise (OIC) if you can’t reasonably afford to pay off your tax debt. If you negotiate a fair settlement, it means that a portion of your debt will be effectively written off. The IRS determines what you can pay based on your current income, living expenses, and asset equity (i.e., the assets that you have).
This is often what companies mean when they talk about the IRS “writing off” tax debt. To qualify for the OIC, you need to make sure your paperwork is flawless and you meet one of the requirements:
- Doubt as to collectibility: There’s no way you can reasonably afford to pay back the total sum of your tax debt before the CSED expires.
- Doubt as to liability: There’s doubt about whether you genuinely owe the tax debt. This is rare and usually needs to be addressed through appeals.
- Effective tax administration: Forcing you to repay your entire tax debt is possible, but would cause unreasonable financial hardship or be unfair and inequitable.
The most common reason the IRS accepts an OIC is that the person can’t reasonably pay off the debt. You’ll need to document your current financial situation with the Form 433-A (OIC) as well as provide the agency with any supporting evidence that will help your case.
Is Canceled Tax Debt Taxable Income?
If the IRS writes off some or all of your tax debt, that “write-off” does not constitute taxable income. In contrast, if you have debt cancelled by a private creditor, it may be considered taxable income, unless the debt was forgiven due to insolvency.
For example, say you settle an old credit card bill for less than owed. You owe $7000, and you settle it for $3000. The credit card company will issue you a 1099-C showing $4000 of income – that’s the amount you saved. Then, you must report that 1099 income to the IRS.
Private creditors, such as credit card companies or mortgage lenders, issue a 1099-C anytime they cancel more than $600 in debt. But the IRS does not do that, so you don’t have to worry about tax forgiveness leading to more tax debt.
| Debt Cancellation: IRS vs. Private Creditors | |||
|---|---|---|---|
| Type | How it Works | How to Apply | Tax Consequences |
| CSED expiration | IRS runs out of time to legally collect the debt | N/A | None |
| Offer in Compromise | IRS settles for less than full amount owed | Form 656 and Form 433-A (OIC) or 433-B (OIC) | None |
| PPIA | Make payments until CSED, with any remaining amount “forgiven.” | Form 9465, Collection Information Statement, such as Forms 433-A or 433-B | None |
| CNC Status | Stop the IRS from collection enforcement until CSED, with any remaining amount “forgiven.” | Contact the IRS and be prepared to submit Forms 433-A or 433-B | None |
| Consumer debt cancellation | Creditor agrees to reduce or cancel debt | Contact creditor or attorney | Cancelled debt reported as income on 1099-C, unless you’re insolvent |
Marketing vs. Reality: How to Avoid the Traps
“IRS write-off” language can be compelling. It makes it sound as though the IRS will automatically wipe your tax debt, but it’s important to scrutinize what you read online before diving straight in.
Be wary of any advert that claims there’s a “limited time program” or a “special application” that only that company can offer you. Instead, investigate realistic options, such as the CSED expiration, a negotiated settlement via OIC, or the debt expiration while you have the CNC or PPIA status.
Solid Strategies Taxpayers Can Use
Instead of waiting or falling for any marketing hype, here are some of the steps you can take:
- Check transcripts for CSED dates: If you’re unaware of when your CSED dates are, now’s the time to find out. Order your Account Transcripts from the IRS. You can do this online or by calling 800-908-9946. When you have the transcript, find the transaction code 150 (which shows the assessment date) and then add 10 years to it.
- Explore legitimate relief options: The legitimate relief options we’ve covered here — such as CNC status, PPIA, and OIC — may be the right choice for you. Explore them sooner rather than later to see which you’re eligible for.
- Work with a trusted tax professional: Instead of relying on “debt write off” promises, choose a trusted professional to assess your case. A tax attorney understands the law and how the IRS operates.
Get Help Tackling Your Tax Debt Now
When your debt has been mounting up for years, it can be tempting to bury your head in the sand. Yet the sooner you take action, the more relief options you’ll have. Trying to handle tricky tax problems by yourself can often land you in more trouble in the long run.
Working with a professional is the answer. Here at Damiens Law, we offer a free 15-minute discovery call to help you get started quickly. We’ll start with a simple conversation about your debt, and then consider the options you’re eligible for. We aim to make the whole process as easy as possible.
FAQs
Does the IRS ever really write off tax debt?
Yes, but it’s not always a straightforward process. The two primary cases when the IRS will wipe tax debt is if the CSED expires or you submit an offer in compromise and the IRS accepts it.
What happens when the IRS debt expires after 10 years?
When the CSED expires, all of your applicable outstanding tax debt is written off. This means the IRS will no longer take action against you to reclaim the tax debt subject to the CSED expiration date. Just remember that there are certain tolling events that can extend the collection statute period.
Does the IRS issue Form 1099-C for canceled tax debt?
No, the IRS doesn’t issue Form 1099-C for canceled tax debt. This form is only used for the Cancellation of Consumer Debt, not tax debt. Creditors may issue this form when they’re willing to cancel $600 or more of your consumer debt.
How do I qualify for an IRS write-off?
You may be able to negotiate an OIC to pay less than the total amount of debt you owe. Alternatively, if the CSED expires on your tax debt, you’ll no longer have to pay it.
