Although “IRS tax relief” is a commonly used term, it does not refer to a single tax relief program. Depending on your financial situation, the IRS may provide relief through an offer in compromise (OIC), penalty reduction, or currently uncollectible status. Each option has its own rules, and eligibility typically depends on your income, assets, expenses, and overall ability to pay.
If you’re dealing with tax debt, understanding these requirements is the first step. This guide details how IRS tax exemptions work, who is eligible, and what the IRS considers when reviewing exemption applications.
What does “IRS tax exemption” mean?
IRS tax relief is not an official IRS program. Instead, it is a broad term used to describe several types of tax relief provided by the IRS to help taxpayers manage or reduce the amount they owe. Official tax relief programs available through the agency include:
- Compromise (OIC): Allows eligible taxpayers to settle their tax debt for less than the full amount owed if they meet strict financial requirements.
- Reduced penalties: Certain IRS penalties may be reduced or eliminated for eligible taxpayers, including taxpayers who have a valid reason for being delinquent.
- Currently Not Collectable (CNC) Status: Suspends IRS collection efforts for taxpayers facing financial hardship
- installment agreement: Monthly payment plans spread out your tax liability over time and make it easier to manage, but it doesn’t reduce your total balance.
The key difference is that not all options reduce your tax liability. Some things, such as OIC and certain penalty reductions, can reduce the amount owed, but CNC status and installment agreements only change how and when payments are made and do not, by themselves, reduce the balance.
Compromise requirements
According to Jason W. Stanfield, Ph.D., CPA, a member of the American Accounting Association, “An OIC is an offer to settle taxes that are less than the full amount owed. Such offers are generally accepted only when the IRS determines that it is unlikely that the full amount owed will be collected, that paying the full amount owed would create financial hardship for the taxpayer, or that the IRS determines that collection is unlikely.”
To qualify, you typically must meet the following requirements:
- Keep all required tax returns up to date
- Keep your estimated tax liability up to date (if applicable)
- Not in public bankruptcy proceedings
- Employers must keep payroll tax deposits current
To apply, you need:
- File IRS Form 656
- Include Form 433-A (Individual) or Form 433-B (Business)
- Pay the $205 application fee (exempted for eligible low-income applicants)
- Include the first payment (usually 20% of the offer or the first installment)
You must also meet the IRS’s financial evaluation standard known as Reasonable Collectability (RCP).
Reasonable recoverability (RCP)
The IRS calculates the reasonable collectability (RCP) using your income, assets, and allowable expenses to estimate the amount you can reasonably collect. An offer in compromise usually needs to be at least this amount or it may be rejected.
IRS penalty reduction requirements
IRS penalty relief is a form of tax relief that can reduce the total amount owed by removing certain penalties. However, the basic tax balance will not be eliminated. When a penalty is removed, the interest associated with that penalty is typically removed as well.
If you have made a good faith effort to comply with tax laws but were unable to do so due to circumstances beyond your control, you may be eligible for reduced penalties. The most common types of relief include initial reduction, reasonable cause, and statutory exceptions.
To request penalty relief, follow the instructions in the IRS notice. Some requests can be fulfilled over the phone, but if not, you can formally request relief by filing Form 843.
First time penalty reduction
First Abatement (FTA) typically applies to penalties for failure to declare, fail to pay, or fail to make a deposit.
To qualify, you must:
- Have a good tax compliance history
- You have not been penalized (or your penalty has not been removed for any reason other than initial abatement) in the past three years.
valid reason
If you are not eligible for initial relief, you may request a reduction of the penalty on reasonable grounds.
The IRS evaluates these requests on a case-by-case basis. You must prove that your failure to comply was due to circumstances beyond your control, such as:
- serious illness
- natural disaster
- death in the family
Generally, penalty reductions are not available in the following cases:
- Rely on a tax expert
- lack of knowledge of tax law
- mistakes or oversights
- Funds alone are not enough
Statutory exemption
Reduction of penalties through statutory exemptions is also available under certain circumstances, such as:
- Taxpayer relied on incorrect written advice from the IRS
- Tax return was mailed by the due date
- The taxpayer lived in a federal disaster area during the period the penalty applied
- The individual was engaged in military operations in a combat zone
Requirements that cannot currently be collected
Currently Not Collectible (CNC) status is a form of hardship relief that temporarily halts IRS collection efforts. It won’t reduce your tax liability, but it will provide short-term financial relief.
To qualify, you must prove that you cannot cover your essential living expenses by paying taxes. The IRS evaluates your income against the allowable expense standard to determine whether you meet this standard.
To apply, you must submit detailed financial information using one of the following:
- Form 433-A (individual)
- Form 433-B (Corporations)
- Form 433-F (simple case)
Installment contract requirements
Installment agreements are not eligible for tax relief as the amount payable is not reduced. However, you can make your tax debt more manageable because you can pay it over time.
The IRS offers several types of payment plans.
- Short-term payment plan: Please allow up to 180 days to pay your balance in full. There are no setup fees, and you’ll need to pay less than $100,000 in taxes, penalties, and interest.
- Long-term installment contract: Monthly payments are typically available over extended periods of up to 72 months. Setup fees apply and typically require a payment of less than $50,000 to qualify for streamlined processing.
- Streamlined installment agreement: A type of long-term plan with simplified approval requirements. Detailed financial statements are not required and balances from $10,000 to $50,000 are available.
To apply, you can use Form 9465 or apply online through the IRS.
If you owe more than $50,000 or don’t qualify for a streamlined plan, you typically need to provide detailed financial information to the IRS as part of your application.
How to know if you qualify for tax exemption
Tax relief typically comes into play after you receive an IRS notice regarding unpaid taxes. This is different from a tax credit, which is claimed when filing a return, or a tax refund, which is issued as a payment or advance credit.
When reviewing a tax relief application, the IRS evaluates your financial situation, including your income, allowable expenses, assets, and filing compliance. There is no single universally accepted standard. Each case will be reviewed individually.
Although eligibility is not guaranteed, you may be eligible for tax relief if:
- Files the necessary tax returns
- Have experienced significant financial hardship, such as job loss, natural disaster, or medical emergency
- If you pay taxes, you won’t be able to cover your basic living expenses.
- Not currently bankrupt
- Keeping the required estimated tax payments up to date
Who generally qualifies for IRS tax relief?
The type and amount of remedies available will vary from case to case and are not guaranteed. However, taxpayers in the following situations are more likely to qualify if they meet IRS requirements:
- Individuals who are experiencing financial hardship and have a fixed income, such as retirees.
- People facing or recovering from significant financial hardship
- people in long-term unemployment
- Business owners who have gone out of business or experienced large-scale bankruptcy
Who generally does not qualify for IRS tax relief?
Some taxpayers are not eligible for relief, especially those who:
- Have a large amount of disposable income or accessible assets
- Failure to meet basic compliance requirements, such as filing returns and paying estimated taxes
- currently in bankruptcy
In these cases, we recommend that you consult a qualified tax professional.
How to apply for IRS tax exemption
To claim IRS tax relief, you must first receive a tax bill from the IRS. From there, you can choose to work directly with the IRS or hire an agent such as a CPA, tax accountant, or tax relief company.
Work with a tax relief company
Some taxpayers choose to hire a tax relief company to help manage their case and communicate with the IRS. Companies such as Optima Tax Relief, Anthem Tax Services, Alleviate Tax, BC Tax, and Priority Tax Relief offer tax resolution services and may assist you in certain situations.
Legitimate companies exist, but it is important to understand their role and limitations.
Tax relief companies can:
- provide education and guidance;
- Prepare and submit documents
- We will communicate and negotiate with the IRS on your behalf.
However, you cannot:
- provide false or misleading information;
- guarantee a particular result or approval
The IRS makes all final decisions regarding tax relief applications.
Apply directly to the IRS
If you apply for infringing offer relief, you must submit the following:
- Form 656
- Form 433-A (Individual) or Form 433-B (Corporate)
- Financial document support
Stanfield said the process could take more than a year. The IRS also offers assistance through its Taxpayer Advocate Service, which can help guide you through the process.
conclusion
The IRS does not offer a single tax relief program. Instead, it offers several forms of tax relief, each with its own requirements and consequences. Eligibility for IRS relief programs is determined on a case-by-case basis and depends on factors such as income, assets, expenses, and overall ability to pay.
Although you can work directly with the IRS, in more complex situations, such as large tax obligations, persistent defaults, or aggressive collection efforts, you may benefit from the guidance of a qualified tax professional to understand your options and avoid errors during the process.
Use the map below to compare your options before seeking help.
Frequently asked questions about IRS tax exemption requirements
How difficult is it to qualify for an offer in compromise?
Qualifying for an offer in compromise is difficult because the IRS will only approve your application if it determines that you cannot reasonably collect the full amount owed. Approval rates are estimated to range from 24% to 40%. However, taxpayers have 30 days to appeal a rejected OIC application.
Can the IRS forgive unpaid taxes?
The IRS may allow some taxpayers to settle for less than they owe through an OIC or reduce certain penalties through abatement. However, it does not offer total forgiveness. Most relief is based on financial hardship or insolvency, and approval is determined on a case-by-case basis.
What income qualifies for IRS hardship status?
There is no fixed income standard for poverty. Instead, the IRS compares your income to the allowable cost of living based on national and local standards. If your income does not cover these required expenses, you may currently be in non-collectible status, which will temporarily halt collection efforts.
Can I apply for an IRS exemption myself?
Yes, you can apply directly to the IRS by submitting the required forms and financial documents. Many taxpayers handle simpler cases themselves. However, in more complex situations, such as large amounts of debt or multiple years of unfiled returns, some people may choose to work with a tax professional or tax relief company.
