Many Americans cross their fingers at tax time, hoping for a huge refund from the federal government. The vast majority of filers — more than 70 percent — do get money back from the government, with the average refund close to $3,000, according to the IRS. But every year, some taxpayers get a nasty surprise: They owe Uncle Sam hundreds or even thousands of dollars that they didn’t budget for.
How Can That Be?
Simply put, if you owe a large sum in taxes, it’s likely because you kept too much of your paycheck during the year and had too little withheld automatically. If you owe more than $1,000, you also have to pay a penalty to the IRS.
This can come as a big shock to people who have had the same withholding as the year before, but didn’t end up owing money previously. Anytime you have a major life change such as getting married, having a child, retiring or starting a new job, you should re-evaluate your tax situation and update your withholding.
Owing money to the IRS can be frustrating, intimidating and time-consuming, but you’re not alone. Each year thousands of Americans are hit with tax debt for a number of reasons, some of which are unclear. However, there are Tax Debt Relief Programs put in place to settle tax debt legally. Understanding such valuable information and knowing what your options are, can prevent an unfortunate occurrence like this from happening again. Read on to learn more.
What is Tax Relief?
Tax relief includes any program or incentive that reduces the taxes people owe or helps create a repayment plan they can afford. If you have a tax debt, and the IRS has contacted you, there are various tax relief programs you can use to ease your payment burden.
How Does Tax Relief Work?
Tax relief programs assist taxpayers who owe money to the IRS but can’t pay it as a lump sum. There are four main ways you can obtain tax relief from the IRS:
- Payment plans and extensions: This is an option for individuals and businesses that cannot afford to pay their tax debt immediately but are able to make monthly payments toward their debt.
- Debt reduction: This is a tax relief option open to people who cannot pay their entire tax debt or make monthly payments without it causing serious financial hardship. In such cases, the IRS may either accept a smaller amount or cancel the debt entirely.
- Penalty relief: This is an administrative procedure the IRS uses to remove or forgive penalties or fees charged to taxpayers who didn’t follow IRS rules.
- Tax representation: This is a right included in the Taxpayer Bill of Rights. If you are being audited by the IRS or you feel there has been a mistake in your tax assessment, you can hire an authorized tax representative to help you negotiate with the IRS. Tax representatives must be attorneys, certified public accountants or enrolled agents. You can also employ an unenrolled tax preparer, if it was the person who helped prepare your taxes.
If you need some time to pay off your IRS debt, a short-term personal loan is one solution.
IRS Tax Relief Programs
If you are behind on your taxes, don’t panic. There are plenty of strategies to help you manage, reduce or even forgive your tax debt. Of course not all taxpayers qualify for tax relief. If you have the money or assets to pay your tax bill and you have no issue with its accuracy, just bite the bullet and write a check to the IRS.
Offer in Compromise
An offer in compromise is an agreement between you and the IRS to settle your tax debt for less than the full amount. This is the tax relief strategy that late-night tax relief infomercials are referring to when they promise to settle your tax bill for pennies on the dollar.
Payment plans offer taxpayers who can’t afford to pay their bill in full a way to minimize late payment penalties and interest. This is the most widely used tax relief option. In 2015, nearly 3 million installment agreements were granted. If your tax debt is below $50,000 ($25,000 for businesses), you can set up a monthly payment plan online, without having to call the IRS or speak to a representative. One of the advantages of an installment agreement is you are not generally required to provide detailed financial statements or go through a thorough financial verification process.
Currently Not Collectible Status (CNC)
Taxpayers who can barely afford to pay for basic living expenses may request the IRS to place their account as Currently Not Collectible. As long as your tax account is categorized as CNC, the IRS will stop trying to collect your tax debt. For example, the IRS will not levy your assets or garnish your wages while you have this status. In 2015, 16.3% of delinquent accounts were reported as Currently Not Collectible.
Penalty abatements are IRS procedures that waive certain penalties charged by the IRS for not following tax laws or IRS regulations. Penalties can add up quickly. In some cases, the penalty and interest amounts are more than 50% of the initial liability. Penalty abatements can be requested for many reasons:
- You got bad advice from an IRS agent (either in writing or orally)
- You received bad advice from a tax adviser
- You suffered a major disaster or emergency, such as a fire, hurricane or earthquake, that affected a significant number of taxpayers in a given area
- It is the first time you ever received a penalty
- Qualifying for a penalty abatement is not easy. You must meet very specific requirements.
Tax Liens Withdrawal
A federal tax lien is the IRS’s legal claim to all your property until you pay your tax debt. The IRS won’t take your property, but you will not be able to sell it, refinance it or use it as collateral for a loan. Tax liens kick in automatically if you fail to pay the taxes the IRS claims you owe within 10 days of receiving your first notice.
Levies are the evil cousins of liens. Levies don’t just “make a legal claim to your property,” they actually take away your property. The IRS uses levies as a way to get your attention when you do not respond to notices. Some levies are a one-time move, in which the IRS seizes a specific asset, such as a bank account. Other levies are ongoing, such as a permanent garnishment of a portion of your paycheck until you repay your debt or the levy is released.
Filing a petition under the bankruptcy code can reduce or even remove your tax debts. Another result of filing for bankruptcy is that it provides an automatic stay that temporarily stops all creditors, including the IRS.
Innocent Spouse Relief
Innocent spouse relief is a powerful tax relief tool for those who are considered liable for their spouse’s IRS debt. To qualify, a spouse must prove:
- The tax understatement was caused by his or her spouse
- He or she didn’t know about the understatement
- And it would be unfair to hold him or her responsible for it.
Who Qualifies for Tax Relief?
The eligibility criteria of tax relief programs vary widely from program to program. Some programs have maximum and minimum tax debt thresholds. For instance, online installment plans are only for taxpayers who owe less than $50,000. Other programs, such as the Offer in Compromise, require taxpayers to meet strict financial requirements to be considered.
Licensed tax relief professionals can help you know which tax relief programs you are eligible for without having to disclose financial information to the IRS.