Cancellation of Tax Debt: Is it Possible?

If you miscalculate or can’t come up with the necessary payment to cover your tax liability due to overextending yourself in other areas of your personal finances, you may wind up incurring tax debt. This tax debt can often come with interest, and cost more to pay off due to penalties and fees associated with late payments to the IRS. These circumstances can put you in both a financial and legal bind, and leave you looking for any possible means to relieve yourself of the debt.

Penalty Abatement Request

Your first step you should consider when you are notified that the IRS is holding you liable for a tax debt you cannot pay is to file a Penalty Abatement Request. A request of this nature, if granted, can result in you being refunded the penalty and automatic fees that are associated with unpaid tax debts. The assistance of a tax professional will help you ensure that your financial situation is represented accurately, which is crucial at this request phase. Your Penalty Abatement Request will typically be granted in cases of:

Serious illness (either physical or mental)
A family emergency, such as the death of a loved one
A tornado, flood or other natural disaster
A problem with financial records such as destruction or loss due to theft
Divorce
Income loss or unemployment if the lost income is severe

Attempting to Claim “Currently Not Collectible” Status

If you have attempted to make the IRS an Offer In Compromise, and been rejected when you tried to make an Installment Agreement, you may be eligible then to attempt to claim Currently Not Collectible status on your account. If you achieve this status, the IRS will discontinue actions pursuing collections. If you claim the Currently Not Collectible status and your financial situation then improves, at that point the IRS can remove your account from Currently Not Collectible status. You may be found eligible for CNC status if:

You have income insufficient to cover your allowable expenses and there is no direct indication that your financial situation will improve in your foreseeable future
You do not qualify for the Offer In Compromise status and you more expense than income, leaving you ineligible for an Installment Agreement as well
You have more allowable expenses than income, and the statute of limitations is approaching its expiration date

Statute of Limitations

The statute of limitations for collecting tax debt that has been allowed to the IRS is a period of 10 years. This period does not begin until the day your tax liability has been confirmed and finalized, which can happen in a number of ways. It could be a proposed assessment that has been confirmed and become finalized, a proven balance due on a tax return, or determination of balance due resulting from a tax audit. The IRS has a period of 10 years to collect this determined amount from you, including any late penalties and interest accrued. Once that 10 year period is up and the IRS hasn’t collected the full amount due, the balance left is considered void and disappears from your account.

Get Legal Advice

If you are trying to eliminate or negotiate tax debt, the assistance of an experienced attorney can go a long way towards helping you be more successful. Your lawyer can guide you and help you interface with the IRS, improving your chances of being granted the cancellation of at least some of your debt.

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