IRS Tax Relief Programs

The sight of an Internal Revenue Service mailing is enough to send most taxpayers into a cold sweat. And when that notice is about back taxes owed, it’s easy to want to ignore it.

Don’t. Pay off as much of your tax debt as you can to prevent the IRS from coming after you hard. The agency is much more powerful than the average creditor — it can place a tax lien that puts a legal claim on your property or levy your assets.

In 2015, the IRS counted some 13.4 million delinquent taxpayer accounts, up from 12.4 million a year earlier. The agency also collected nearly $2.3 billion in back taxes.

But as much as the IRS may seem like a bully, it also tries to help struggling taxpayers through the process. Here’s a guide to tax relief options.

What relief programs does the IRS offer?

  • Fresh Start
    In 2011, this program launched to alleviate pressure on delinquent taxpayers. It bumped up the amount taxpayers can owe to $10,000 (in most cases) before the IRS issues a federal tax lien. It also adjusted allowable living expenses, factored student loan and local tax payments into approved budgets and more.
  • Penalty relief
    If you failed to file a tax return, make a deposit or pay taxes on time due to circumstances beyond your control, you may be able to work with the IRS on handling the penalty payments.Submit a Claim for Refund and Request for Abatement (Form 843). In some cases, you’ll need to provide extra information. For example, the IRS sometimes requests documentation such as hospital or court records. Also, check out the IRS’ online penalty appeal tool. If you’re appealing a penalty, the charge will continue to accrue throughout the relief application process.

    Reasonable cause: Try this option if you “used all ordinary business care and prudence” to meet your tax obligations but couldn’t due to factors such as serious illness, inability to obtain records, fire, natural disaster and more.

    First Time Penalty Abatement policy: This applies if you’ve never had to file a return before or had no penalties for the three years prior and have taken steps to file the required returns and pay taxes due.

    Other options: If you received incorrect verbal advice from the IRS, you may qualify for administrative relief. If the inaccurate advice was written, ask for a statutory exception. Tax legislation may also give you an out from a penalty — check for exceptions in the Internal Revenue Code.

  • Offer in Compromise (OIC)
    Taxpayers can use this to settle with the IRS on a payment less than the total tax owed. The Fresh Start program expanded the OIC program, making it available to a larger group of people. Last year, taxpayers proposed 67,000 offers in compromise; the IRS accepted 27,000 of them, amounting to $204.7 million.The IRS usually settles for whatever amount it believes is the most it can collect from the taxpayer within a reasonable amount of time. But if the agency thinks the taxpayer is capable of paying the full amount as a lump sum or in installments without causing severe financial difficulty, no dice.On your OIC application, you’ll suggest an amount that you can pay to the IRS in lieu of your actual balance. Then, you’ll submit a lump sum of 20% of that total offer in cash, followed by the rest in five payments or less once you’ve been approved.

    Alternately, you’ll send in a smaller amount with your application, continue to make installment payments while the IRS reviews your offer and then pay off the remainder monthly once approved.

    The IRS will evaluate your ability to pay your balance based on income, expenses and asset equity. If you’re in an open bankruptcy proceeding, you’re ineligible. Check whether you qualify with the IRS’ online tool here. Step-by-step application instructions and forms are here.The OIC process can take months, if not years. In cases when the IRS doesn’t make a determination on your application within two years of receiving it, consider your offer accepted. If the IRS rejects your offer, you can request an appeal via Form 13711.

  • Payment plans and installment agreements
    Individual taxpayers who owe up to $50,000 can make monthly payments for up to 72 months, though some may qualify for a short-term agreement if the balance owed is less than $100,000. In some situations, the IRS can’t deny a installment request if you owe less than $10,000, according to the Federal Trade Commission. Businesses must owe $25,000 or less in payroll taxes.Taxpayers who meet the requirements can apply online. Your outstanding balance will continuously build up interest until it’s paid off. Those who don’t qualify to participate in the online installments program can try their luck by submitting an Installment Agreement Request (Form 9465) and a Collection Information Statement.

Should I hire a tax relief company?

Remember that dealing with the IRS is not an easy process.

You can apply for any of the IRS relief programs without third party help. But if you’re tempted to use an outside intermediary, tread carefully: Tax relief scams are on the rise.

“The truth is that most taxpayers don’t qualify for the programs these fraudsters hawk, their companies don’t settle the tax debt, and in many cases don’t even send the necessary paperwork to the IRS,” according to the FTC. “Adding insult to injury, some of these companies don’t provide refunds, and leave people even further in debt.”

If you’re struggling with your taxes, make sure to reach out to a reputable firm for a free evaluation. The top rated company on SuperMoney is Optima Tax Relief.

Tax relief fees

Some of the IRS programs come at a cost. OIC has a non-refundable $186 application fee for anyone above a certain income threshold.

Tax attorneys generally don’t come cheap. Some charge premiums based on where they’re located, others ask for hundreds of dollars in hourly fees. Many require a flat fee to prepare and submit certain paperwork.

Some tax relief companies ask for thousands of dollars upfront, often without explaining how their services will be billed. The FTC said it often receives complaints that such companies later make unauthorized charges to clients’ credit cards or make withdrawals from their bank accounts. If you decide to go with a tax relief company, know their refund policies inside and out and make sure they have qualified attorneys on staff.

Report problems to the IRS Office of Professional Responsibility or file a complaint with the FTC online, which will log it with the secure Consumer Sentinel Network.

understanding your paycheck

Everyone is happy when payday comes around. If paid by the hour, most people have a general idea of how much that paycheck will be based upon how many hours have been worked in the pay period. For those with jobs based upon an annual salary, there is also an expectation (based on the monthly salary) as to what the paycheck will be. Yet many people are disappointed when they see the amount they receive after all the deductions are taken out.

Paycheck Basics

Every paycheck stub is actually a legal document, and therefore must contain several items. Two things you should see on every check are the pay period and the pay date. The pay period is the period of time that you worked in for which you are receiving the check. The pay date is the actual day that pay is issued to you as an employee.

paycheckYou should also see your name and address on your check. It is important to always keep your payroll department updated with your most current address, even if you get your check direct deposited. This is because they may need to send you important notifications throughout the year via mail, and you may not receive them. They also will use this address to send you your W-2 form at the beginning of each year which summarizes your prior year’s earnings and is necessary for filing your tax returns.

You may also see a section that shows your social security number (or part of it) and your marital status and exemptions/allowances. The marital status and number of exemptions you are claiming comes from the W-4 form you filled out when you started working for your employer, and those figures can always be adjusted by talking to your payroll department if your situation changes.

Our government allows us to claim deductions for a variety of items (if you have children to support, a business to operate, work travel expenses). The W-4 Form specifically allows you to claim dependents: those who depend on you for support. The more dependents you have, the less taxes you are required to pay. However, if you put too many allowances and are underpaying the government, you’re going to have to pay more money during the tax season in the first quarter of the following year. If you are supporting only yourself, people typically claim ‘1’. Some people may even place a zero there, just in order to overpay and ensure that they will be receiving a return the next time they file their taxes.

Gross Pay vs Net Pay

Many people are confused by the difference between their gross pay and their net pay. Simply put, your gross pay is the total amount you earned during the pay period, and your net pay is the amount you are actually receiving once all the deductions are taken out.

paycheckSo What Are All Those Deductions For?

To understand these deductions, we’re going to examine each of them so you can understand exactly what is being deducted from every paycheck you receive so that it makes more sense. (When creating a budget, it must be based on your net pay, since you basically can kiss the deductible income goodbye.)

The first section of deductions is a list of statutory or mandated deductions. These are usually indicated on your check stub under the category Taxes and will most likely include the following:

Federal Tax Withholding

Every country charges their residents a percentage of their wages in order to run the government and provide a large variety of government services to the population. Believe it or not, many citizens of other countries pay a great deal more than Americans do. The United States adjusts the charge for its population based on the amount of income as well as a person’s circumstances (i.e. single, married, divorced, salaried, hourly wages, etc.) seeking to be as fair as possible to each person. Of course, many people will never be happy with what they are charged, no matter what! Yet the list of things that our government provides us with by using the money charged to us through our taxes is voluminous, and most are quite necessary. That being said, every paycheck has Federal Tax Withheld.

State Tax Withholding

Secondly, every state has the same approach. A portion of your paycheck is withheld in order to operate your state government and the services they provide you with. Each state determines its own percentage rate to withhold in order to operate the state government. This is what the money deducted as State Tax Withheld, is related to.

paycheckLocal Tax Withholding

Local taxes vary depending on your state and local jurisdiction. Several states have very complicated local tax structures, including Michigan, Pennsylvania, and Ohio, while most states do not impose a local tax at all. If you are subject to Local tax withholding, you will see this line item on your pay stub usually below the state withholding amount.

FICA

If you see a line item that says FICA, that is the deduction for the Federal Insurance Contributions Act tax which both the employee and the employer have to pay. This tax is imposed to fund Social Security and Medicare, both federally run programs that provide benefits for retirees, the disabled, and children of deceased workers.

If you do not see this deduction listed on your check stub, don’t worry because chances are that you are still paying into the programs and the deductions are listed individually as Social Security and MediCare.

Social Security Deduction

Then we come to the Social Security Employee deduction, which actually goes into a fund so that you have some financial security when you enter your senior years. In other words, unlike the Federal and State deductions which get applied to the things your government provides to you as a citizen, the social security withholding is actually like a savings account (controlled by the government) which will get paid out once you retire.

This part of the government has been under great scrutiny over recent years due to people living longer than they used to when this plan was set up. This is causing the social security funds to be depleted faster than anticipated, and many fear that it won’t be long before the money runs out.

So if we are all paying into the fund, how can it run out? Simple. There are far more seniors that are taking distributions from the fund than there are working adults paying into it. The solution? Well, we are not really sure that there is one yet, which is a great reason why you should be planning and saving towards being able to fund your own retirement and not relying on social security still being there when you’re ready to stop working.

paycheckMediCare

There will also be an item listed as Medicare, which is another deduction to serve you in your senior years. This is a federal health insurance program, administered by the Social Security Administration, which provides health care for the aged. This is another deduction that is matched by your employer. Employers are required by federal law to match your contribution to both the Social Security and Medicare programs.

State Disability

Another deduction you may see on your paycheck is for state disability. Each state has the right to deduct a small portion of your income to go into the state’s Disability Fund, which you would have access to funding from if you were ever to become disabled.

This line on your paystub will most likely list your state, such as California, followed by Disability or SUI/SDI, (i.e. CA-Disability or CA-SUI/SDI).

Other Deductions

The next set of deductions is more optional (usually) and may be listed on your paycheck stub as Other Deductions or possibly as Adjustments. Many items can fall under this category including your portion of any company sponsored health plan (including medical, dental, vision, etc), any garnishment orders received by your employer, 401k contributions, union dues, and more.

Each of these items are all things that your employer should make you aware of before deducting. If you don’t understand other deductions listed, you have the right to ask for an explanation from your Human Resource Director, or Payroll Department.

paycheckPre-tax vs. Post Tax Deductions

Another important thing to recognize is that many of your deductions may be listed as Pre-Tax and shown separately on your check stub. These items are deductions that are taken out of your gross pay before taxes are applied. This essentially lowers your total taxable income and therefore lowers the amount of taxes taken out of each check.

Some examples of pre-tax deductions include 401k contributions, medical coverage, and more.

Post-Tax deductions on the other hand, are deductions that are taken after taxes have already been applied. These deductions usually include any garnishments or loans you need to pay back to your employer, and similar items.

Show Me The Money!

Finally, we get to the good part! You should see an actual check in your name usually at the bottom of the pay stub which is for the amount calculated based on all of the items we discussed above. If you have elected to have your paycheck direct deposited into one or more of your bank accounts, you may see something that looks like a check at the bottom but really is just a receipt accounting for where your hard-earned pay went.

If there is anything on your paystub that you don’t understand, don’t hesitate to go to your company’s administration and find out who can explain deductions to you. You have a right to know!

Why-Tax-Refunds-Suck

Why Getting a Tax Refund Sucks

You may have seen commercials or ads featuring happy families wearing leis around their necks, men checking out big-boy toys or women clutching multiple shopping bags with labels like Burberry or Saks Fifth Avenue – all courtesy of a big income tax refund from Uncle Sam.

The average federal income tax refund is indeed substantial – a hefty $2,700 for 2012 and $2,790 for the first quarter of 2013, according to the IRS. However, those checks are not actually the bonanza that commercial tax return services would have you believe. In fact, if you consistently receive large income tax refunds, you should seriously consider making major adjustments in the way you think about–and pay–your taxes.

Everyone knows that getting a tax refund sucks.

Interest Free Loans to the Government!

money-puzzle

That check you’re so happy about getting each year? It’s actually your own money. Worse, it’s money that you have lent to the federal government (or to the state) interest free. Odds are you have never received an interest-free loan from anyone outside your immediate family or close circle of friends. Yet every year, millions of Americans willingly provide Uncle Sam or their state governments with a twelve-month loan with zero interest. The reward they receive for their generosity is – wait for it – getting their own money back.

It doesn’t sound so great when you think of it that way, does it?

Inflation and Your Shrinking Dollars

irish-money

As of this writing, inflation is low, but it isn’t nonexistent. This means that the money that you receive back from the IRS is worth less than it would have been if you had been able to spend the money at the time that you earned it. For instance, according to inflation calculator available through the Bureau of Labor Statistics website, that $2,700 income tax refund many Americans received in 2013 is equivalent to $2,711 in 2014 dollars. Perhaps $11 isn’t enough to stress over, but if the rate of inflation goes up, the impact could become considerable in later years.

Making the Proper Adjustments

Tax Mistakes

Many people hesitate to lower the tax deductions taken from their paychecks because they don’t want to owe money at tax time. Others want to avoid hefty underpayment penalties. Both are legitimate concerns, but concerns that are easily dealt with. You can estimate the proper amount of income tax to have withheld from your paycheck by using the IRS Withholding Calculator, available through the IRS website. If you need to make adjustments based on the results of the calculator, simply submit a new W-4 form to your employer.

The forms are available for free download through the IRS website and can be submitted at any time during the year (or even multiple times per year if your income fluctuates). You also need not worry about paying a penalty on any income tax that you may end up owing to Uncle Sam if any of the following three situations apply to you:

  • You owe less than $1,000
  • You paid at least 90 percent of your tax liability before filing your 2014 tax return
  • You paid at least 100 percent of what you owed in federal income taxes for 2013 (or 110 percent of your 2013 tax obligation if your income is $150,000 or more)

If You Still Want That Tax Refund

Some people use tax refund checks as a form of forced savings, which is understandable. Nonetheless, if you truly are committed to establishing a savings fund for a big vacation, your retirement fund or for some other reason, try this strategy instead: divide the amount of your previous year’s refund by the number of paychecks you receive each year. Place the resulting amount in a savings account with every paycheck.

Once you have collected enough money in your savings account, make a withdrawal to purchase a certificate of deposit or other financial investment instrument. Rinse and repeat with each paycheck throughout the year. If you stick to “safe” investments, you won’t risk losing your hard-earned cash, and odds are that you will have accumulated more money at the end of 12 months than you would have received from a refund check.

This article was written by staff writer Audrey Henderson. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape. Photos: Flickr Creative Commons

With tax season right around the corner, the tax man will soon be knocking at your door. Though filing your taxes and keeping track of them is probably not your favorite task, new apps on the market are making the often dreaded chore a little easier. Many of these handy mobile apps for taxes are also free.

1. IRS: IRS2Go

IRS2GO app

Developed by the IRS, this free app enables you to connect with the IRS whenever and wherever you are. You can check on the status of your refund (the fun part!) and use the app to sign up to receive IRS Twitter feeds and helpful, potentially money-saving tax tips.

2. TaxACT: Mobile Apps

TaxAct mobile apps

TaxACT has apps that when used together make the process of filing your tax returns a breeze.

TaxACT Express allows you to easily and at no cost file your federal taxes from your smartphone. You can complete the entire return on your phone or start the return on TaxACT.com and finish on the go.

TaxACT Central is a companion to Express. This app contains a tax return calendar and checklist that allows you to get organized and ready to file your returns. It also contains a help center and allows you to check the status of your e-filed returns and your federal refund.

DocVault is another companion app that you can use throughout the year to make filing a breeze. The app allows you to organize and save your necessary tax information and documents throughout the year. You can securely save photos of tax forms, banking records, receipts, invoices and charitable donation statements.

3 TaxSlayer: Free Tax Refund Calculator

TaxSlayer App

Worried about owing a lot of money or curious how big of a refund you’ll be getting? TaxSlayer is a free app that allows you to use your paycheck or W-2 to estimate your 2013 tax refund. That way you’ll know if you need to celebrate or start saving.

4 Bloomberg BNA: Quick Tax Reference

Bloomberg BNA

This app gives you access to tax rates and schedules from now back to 2011. Discover key information such as standard mileage rates, individual tax rate schedules, income tax rates for estates, capital gains and dividends taxed as net capital gain, retirement plan limits, and more. The app allows you to quickly change the year of reference.

5. H&R Block: 1040EZ Tax App*

HR BLock Tax App

This app helps you complete U.S. federal and state returns using step-by-step instructions. The app is free to download and allows you to prepare your tax returns and e-file for free. Features include the ability to take a picture of your W-2 with your phone and import it into your return.

6. TurboTax: Tax Caster

TurboTax Tax Caster

This app allows you to get a quick estimate of your 2013 tax refund. You simply enter some basic information, and you see your refund add up. The program uses the same tax calculator used in TurboTax. Based on your tax situation, the app will recommend the right TurboTax product for your needs.

7. TurboTax: MyTaxRefund

MyTaxRefund

As its name suggests, this app allows you to quickly check on the status of your e-filed federal and state tax returns. It also gives you an immediate estimate of the date you can expect your federal tax refund. It’s not necessary to be a TurboTax customer to use the app.

8. CPAdirect: ASK A CPA

Ask A CPA

Get answers to your pressing tax questions with this free app, which was created by a CPA. Up-to-date answers found on the app include latest tax changes, itemized deductions rules, tax rates and how to file.

9. TurboTax: SnapTax

SnapTax

With this easy-to-use app, you simply snap a photo of your W-2, answer a few simple questions and e-file from your phone. Filing your federal return is free; there’s a charge for your state return. If you’re filing a 1040EZ form, you can get your return done in as little as 10 minutes.

10 Intersog: Dictionary of Tax Terms*

Dictionary Of Tax Terms

If you want to learn more about taxes in general and what all the lingo means, this app will help you get up to speed. It contains more than 600 tax terms and is fully browseable and searchable.

These tax apps unfortunately won’t make filing your taxes unnecessary, but they will help ensure that the process runs more smoothly.

*All apps are available on iTunes, though this app may not be available for Android users.

Julie Bawden-Davis is a staff writer for SuperMoney. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Photos: FlickrAbout.com, IRS.gov, Apple, Bloomberg BNA, Geeksugar, Intuit Labs, Ask A CPA