What Is Tax Debt Forgiveness?

Tax debt forgiveness is a type of financial activity that some tax agencies provide for taxpayers under specified conditions. Essentially, this type of support with tax debt involves evaluating the circumstances of a taxpayer who currently owes an outstanding balance for a tax period, and determining if there are grounds for dismissing all or part of that tax obligation. Many national as well as state and provincial tax agencies have policies and procedures in place that govern how tax debt forgiveness is managed and what circumstances must prevail in order for a taxpayer to be granted this sort of assistance.

Typically, the process of tax debt forgiveness is initiated by the taxpayer. Utilizing the forms and procedures put in place by the tax agency, the taxpayer will submit all relevant information regarding a request to have the current tax debt dismissed or at least reduced. Authorized personnel at the agency will evaluate the application and other supporting documents, verify the information provided and determine if there is a reason to consider the request further. If insufficient data is provided or if the applicant does not meet the basic criteria required by the agency to be considered for tax debt forgiveness, the application will be rejected. Should the agent assigned to review the application believe there are grounds for considering the request for forgiveness, contact with the taxpayer is initiated and the investigation continues.

Only after the tax agency is fully satisfied that the taxpayer meets the criteria for tax debt forgiveness will this type of debt dismissal come to pass. When the entire debt is dismissed, the taxpayer is notified and the debt for that particular tax period is considered to be settled in full. Should the agency determine that only a portion of the outstanding debt should be dismissed, the agent handling the case will often work with the taxpayer to arrange payment of a reduced amount.

There are a number of situations in which a tax agency may choose to extend tax debt forgiveness in some fashion. Situations that make it impossible for the taxpayer to earn income or sell assets in order to settle the debt, such as extended periods of poor health, confinement in some type of mental institution, or other extenuating circumstances that are recognized by the tax agency, may be grounds for qualifying for a dismissal of the tax debt. Since tax laws and the regulations related to this type of debt forgiveness will vary form one jurisdiction to another, taxpayers who think they may qualify for this type of assistance should consult the tax agency or agencies that currently hold the debt.