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According to the statute of limitation - the IRS has ten years starting from the date additional tax liability was assessed to collect the tax debt. If the IRS would not collect the debt - it becomes uncollectible and will be forgiven.Another option would be to ask the IRS to abate penalties - you need to provide a reasonable cause to have all or part of penalties abated. The IRS would not forgive interest charges - at least that is very unlikely.If neither works for you - as you are on the payment plan with the IRS - the only way to eliminate your tax liability is an offer in compromise (OIC). That is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
However - OIC is relatively complex matter - and most likely you need someone to represent you with the IRS. I suggest contacting a local CPA or Enrolled Agent and he/she will evaluate your situation and estimate a reasonable offer.
Unfortunately - there is no easy solution.
So what course of action would you recommend to me? Try and just wait out the ten years?
First of all - try the IRS to abate penalties - there is nothing to lose - but in case of success - part of your problem will be solved.
I may not say for sure that any specific reason will be accepted. There is no need to talk to the IRS, but you might need help to prepare a request to forgive penalties. If accepted - that will solve part of the problem.
You might need a local CPA or Enrolled Agent to represent you with the IRS.You may file a form 843 - http://www.irs.gov/pub/irs-pdf/f843.pdf to request the penalty be abated. Here are instructions - http://www.irs.gov/pub/irs-pdf/i843.pdf
That is a relatively new form - previously the IRS accepted an abate request as a free form letter that may be attached to a tax return or sent separately.
Get installment plan in place - this way you will avoid situation when the IRS will garnish your bank account and wages.If you unable to pay - OIC would be an option. You should use the Form 656, Offer In Compromise The OIC fee is $150. You may find additional information in Offer in Compromise Booklet - http://www.irs.gov/pub/irs-pdf/f656b.pdf.
The IRS tells that we should beware of promoters' claims that tax debts can be settled through the offer in compromise program for "pennies on the dollar."