The Internal Revenue Service (IRS) offers several types of relief to taxpayers who are unable to pay their tax debts, including installment agreements, offers in compromise, and hardship relief. However, for taxpayers who are facing an unjust or inequitable situation, the IRS also offers equitable relief. This relief is designed to help taxpayers who are facing financial hardship or other extenuating circumstances that prevent them from paying their tax debts. In this post, we will discuss what IRS equitable relief is, who may qualify for it, and how to apply for it.
What Is IRS Equitable Relief?
IRS equitable relief is a type of relief that the IRS may grant to taxpayers who are unable to pay their tax debts due to extenuating circumstances. This relief is intended to provide relief from unfair or inequitable situations that arise from the assessment or collection of taxes. Some common situations that may qualify for equitable relief include:
- Divorce or Separation: A taxpayer who was unaware of or had no control over their spouse’s financial activities may qualify for equitable relief.
- Abuse or Domestic Violence: If a taxpayer was unable to fulfill their tax obligations because of abuse or domestic violence, they may be eligible for equitable relief.
- Serious Illness or Disability: Those who owe taxes but were unable to work or pay them because of a serious illness or disability may be eligible for equitable relief.
- Other Extenuating Circumstances: The IRS may grant equitable relief in other situations where it deems it appropriate to do so.
Who May Qualify for IRS Equitable Relief?
To qualify for IRS equitable relief, a taxpayer must meet certain criteria. The taxpayer must:
- Have a tax liability that is not currently being paid.
- Have exhausted all other available payment options, such as installment agreements or offers in compromise.
- Not have engaged in any illegal activity, fraud, or intentional misrepresentation.
- Be able to show that the failure to pay the tax liability was due to extenuating circumstances beyond their control.
- Not be able to pay the tax liability without causing undue financial hardship.
How to Apply for IRS Equitable Relief
To apply for IRS equitable relief, a taxpayer must submit Form 8857, Request for Innocent Spouse Relief, to the IRS. The form must be submitted within two years of the first collection activity by the IRS, such as a levy or a lien. The taxpayer must provide detailed information about their financial situation and the extenuating circumstances that prevented them from paying their tax debts. The IRS will review the application and determine whether to grant equitable relief.
What Happens After an IRS Equitable Relief Application Is Submitted?
After an IRS equitable relief application is submitted, the IRS will review the application and decide. The IRS may request additional information or documentation to support the application. If the IRS grants equitable relief, the taxpayer will be relieved of their tax liability, and any interest and penalties associated with the liability will be waived. If the IRS denies equitable relief, the taxpayer may appeal the decision within 30 days of receiving the denial.
Advantages of IRS Equitable Relief
The main advantage of IRS equitable relief is that it provides a way for taxpayers to avoid paying tax debts that they cannot afford due to extenuating circumstances. This can provide significant financial relief to taxpayers who are facing financial hardship or other difficult circumstances. Additionally, equitable relief may be granted even if the taxpayer is not eligible for other types of relief, such as installment agreements or offers in compromise.
Disadvantages of IRS Equitable Relief
There are also potential disadvantages to seeking IRS equitable relief. The process can be lengthy and may require extensive documentation and evidence to support the application. The process can be unpredictable because the IRS has considerable discretion in deciding whether to grant equitable relief. Some other potential disadvantages of seeking IRS equitable relief include:
- Possible Denial: There is no guarantee that the IRS will grant equitable relief, even if the taxpayer meets all of the criteria. The IRS has broad discretion in deciding whether to grant equitable relief, and the decision may depend on the specific facts and circumstances of each case.
- Increased Scrutiny: The IRS may scrutinize the taxpayer’s financial situation and personal circumstances more closely when reviewing an equitable relief application. This could result in additional questions or requests for documentation, which can be time-consuming and stressful.
- Limited Relief: Even if the IRS grants equitable relief, it may only apply to a portion of the taxpayer’s outstanding tax liability. This means that the taxpayer may still be responsible for paying a significant portion of their tax debt.
Alternatives to IRS Equitable Relief
If a taxpayer does not qualify for IRS equitable relief or if they prefer to pursue other options, there are several alternatives available. Some of these alternatives include:
- Installment Agreements: Taxpayers can negotiate installment agreements with the IRS to pay off their tax debt over time. This can be a good option for taxpayers who can make regular payments but cannot pay the entire tax debt at once.
- Offers in Compromise: In order to settle their tax debt for less than the full amount owed, taxpayers can also bargain offers in compromise with the IRS. If a taxpayer meets the eligibility requirements and cannot afford to pay their entire tax debt, they may benefit from this option.
- Currently Not Collectible (CNC) Status: The CNC status is available to taxpayers who are struggling financially and are unable to pay their tax debt. This status gives the taxpayer some time to recover financially while also temporarily stopping the IRS’s collection efforts.
IRS equitable relief can be a valuable option for taxpayers who are facing financial hardship or other extenuating circumstances that prevent them from paying their tax debt. However, the process can be lengthy and unpredictable, and the IRS has broad discretion in deciding whether to grant equitable relief. Taxpayers who are considering equitable relief should be prepared to provide extensive documentation and evidence to support their application and should also consider other relief options that may be available to them.