Ask Bob: How to Get the IRS to Forgive Tax Debt
Robert Powell, CFP®
My husband was unemployed and we were living on funds from an IRA that he inherited from his father. My husband also took early distributions from his own IRA for living expenses. As a result, we owed taxes to the IRS for three years but did not have the money to pay. My husband then passed away and I have been making small payments on our tax debt. I'm wondering if I have any options with the IRS for possible forgiveness of any of this tax debt?
We are so sorry to learn that you’re in this difficult situation.
“It’s hard to say for certain exactly what sort of relief that you may – or may not – qualify for without knowing a lot more information,” says Jeffrey Levine, director of advanced planning with Buckingham Wealth Partners.
“That said, it sounds like the current debt arose from joint tax returns that you filed with your husband, and up to the year of his passing,” says Levine. “If so, the tax liability shown on the return, and your resulting debt to the IRS, is generally considered to be what is known as ‘joint and several.’”
In short, this means that the IRS can treat the full amount of the debt as though it is 100% yours, even though the income that created the liability came from accounts your husband controlled.
“There are, in very limited circumstances, ways to remove yourself from that debt like that, such as through something called “innocent spouse relief,” but given the information you provided, it does not appear that you’d qualify for such relief,” he says.
Nevertheless, Levine says you may still have a variety of options at your disposal. “You may, for instance, seek an Offer in Compromise with the IRS,” he says.
An Offer in Compromise is essentially a process where you offer the IRS some amount of money – but less than your current tax debt - in hopes that they will accept the lesser amount as payment in full for your outstanding tax liability. “As you might imagine, this is not something that the IRS does in ‘normal’ circumstances, as everyone would rather pay less,” says Levine. “That said, in situations where a taxpayer has insufficient assets and/or income to pay the amount that they owe, or where due to exceptional circumstances, paying the amount due would cause an economic hardship or would be unjust, the IRS may accept the proposed terms of the Offer in Compromise.”
Once agreed upon, the reduced tax debt may be satisfied through either a lump-sum payment (which can actually be comprised of as many as five payments), or via monthly installments.
In the event that you do not believe that your debt is eligible for reduction via an Offer in Compromise (or such a request is rejected by the IRS), Levine says you can also consider entering into a formal Payment Plan with the IRS.
The IRS offers both short-term (liability paid within 120 days) and long-term payment plans, depending upon your needs. “Here, given your situation, it sounds like a long-term payment plan is likely the most viable option,” says Levine. “If you owe $50,000 or less in combined tax, penalties and interest, then you can apply for the payment plan online, using a streamlined procedure, by visiting https://www.irs.gov/payments/online-payment-agreement-application. If your outstanding debt is greater than $50,000, you can still apply for a payment plan, but you’ll have to do so either by paper, using IRS Form 9465, or by calling the IRS.”
“Best of luck getting things back on track as quickly as possible,” says Levine.
Got questions? Get answers.
Got questions about the CARES Act, Social Security, Medicare money in general? Email Robert.Powell@Maven.io.