If you owe $10,000 or more in taxes, you need to hear about the IRS’s best-kept secret: tax debt forgiveness. This brief guide explains what tax debt relief is and how you can use it to reduce your IRS tax debt.
Millions of Americans are drowning in tax debt. If you are one of them, you know about the stress and frustration of dealing with the IRS. The taxman doesn’t care about your medical bills, that you lost your job, or that you’re going through a messy divorce.
The IRS can hold on to your refund, take a chunk of your paycheck, put a lien on your bank account, seize and sell your property, and revoke your passport. Uncle Sam also can take 15% of your Social Security check, a benefit that’s off-limits to private creditors.
But that doesn’t have to happen.
There are tax debt relief programs that may help you wipe your tax debt clean. However, these programs may not apply if you have shown a pattern of evading IRS efforts to communicate with you. So it’s important to take action and resolve these tax issues before it’s too late.
Why would the IRS be interested in forgiving your debt?
The IRS can put a lien on all your property, withdraw money from your bank accounts, and even garnish your wages. All without the need for a court order. So, why would the IRS be interested in forgiving your debt? The answer lies in two rarely published facts about the IRS.
IRS resources are constrained. Five years of budget cuts by Congress have limited the IRS’s ability to enforce its laws. The IRS budget has been reduced by $1.2 billion since 2010 despite having 12.8 million more tax returns to process. Since 2010, the IRS has laid off 17,000 workers, which explains why, in 2015, they only audited 0.7% of all tax returns.
The IRS has a limited timeframe to assess tax liability. It has 10 years to collect taxes but only three years to assess your tax liability. These time restrictions put much pressure on already overworked IRS agents.
In a nutshell, the IRS does not have the budget to prosecute every case. It would rather focus its resources on wealthy taxpayers who frivolously refuse to pay their tax liability. If you’re struggling to pay back taxes, but you’re willing to negotiate, the IRS may be ready to settle. Hire a tax resolution firm and trim your tax debt to a more manageable amount.
How does tax debt relief work?
Tax debt relief is the IRS answer to crushing tax debt weighing on so many American families who simply don’t have the money to pay their taxes. If you don’t pay your taxes, the IRS may charge a penalty of 0.5% of your unpaid taxes. You’ll be charged an additional 0.5% for each month you fail to pay, with a maximum of 25%. On top of that, you’ll be responsible for paying interest and additional penalties, which may be as high as 5% of the unpaid balance.
If you go long enough without paying your taxes, the government may also levy your bank accounts, garnish your wages or place a lien on your house. Also, your creditworthiness may plummet, making it harder for you to qualify for credit or loans.
It is technically possible to settle your tax debt for less than the total amount you owe. IRS tax debt relief programs help taxpayers by reducing the amount they owe, giving them more time to pay, or a combination of both. It’s a win-win for the IRS and for you to pay your tax.
Remember, the IRS is underfunded and overworked. So it prefers to go down the path of debt forgiveness than waste its resources going to trial or pursuing a long collection process. To file a settlement, the IRS requires you to complete complicated forms and provide detailed financial reports. Many taxpayers are rightfully wary of sharing financial information that could later be used against them. So, millions of dollars in tax relief go unclaimed every year.
How can I get my tax debt forgiven?
The IRS Fresh Start Initiative has multiple tax debt relief programs you can apply for, but only three that offer debt forgiveness:
- The Offer in Compromise program.
- The Partial Pay Installment Agreement program.
- The Penalty Abatement program.
You may be entitled to tax debt forgiveness. Don’t miss out. SuperMoney’s tax debt relief experts can help simplify the process. Get a free consultation with a tax debt relief expert to determine which tax debt relief programs you qualify for. You may also want to check out the other tax relief programs offered by the IRS.
The Offer in Compromise Program
An offer in compromise is a settlement where the IRS accepts less than the total debt amount in exchange for a lump sum, alternatively up to two years of regular monthly payments. As far as debt forgiveness goes, offers in compromise are usually the best deal available to taxpayers. The problem is it’s not easy to meet IRS eligibility criteria.
Since 2010, the IRS has relaxed its standards. In 2019, the IRS accepted 33% of all offers in compromise. The acceptance rate is even higher for taxpayers who hire a tax debt relief company. It’s common for a tax debt relief firm to maintain acceptance rates of over 90%.
IRS Offer-In-Compromise Acceptance Rate Trend.
The IRS sets stringent criteria to approve an offer in compromise. The taxpayer must meet one of the following three conditions:
Effective Tax Administration
The condition in which the taxpayer does not contest the collectability or liability. Additionally, they can demonstrate that paying their debt would create an unfair financial hardship or financial distress through certain and specific circumstances. In that case, the IRS may accept the offer in compromise.
Doubt as to Collectability
The condition where the IRS estimates the taxpayer will never feasibly pay off their tax bill in full. The IRS will examine your assets and current and projected future income to determine if they will potentially collect more from enforcing traditional collection means than if they would settle for an offer in compromise.
Doubt as to Liability
This condition requires the debtor to prove there is doubt that the assessed tax liability is correct; this could be due to an examiner’s mistake, omitted information, or new evidence that would change the total tax owed.
Partial Pay Installment Agreement
The Partial Pay Installment Agreement is another debt forgiveness program. It does not get much attention and publicity, but it often has even better payment plan terms than offers in compromise.
A Partial Pay Installment Agreement is similar to an Offer in Compromise in that the IRS forgives part of your debt, but it has longer payment plan terms: typically, 36 to 72 months. Although Partial Pay Installment Agreements typically include less debt forgiveness, they are easier and faster to qualify for, and you don’t have to provide as much financial information.
If you are late paying or filing a tax return, the IRS will charge you interest and penalty fees. These fees are no joke. The accrual of penalties and interest often represents 50 percent of the initial tax liability, according to a 2015 report by the National Taxpayer Advocate.
The IRS has a penalty abatement program, another debt forgiveness program you can use to request a reduction or removal of interest and penalty fees. Unfortunately, many taxpayers miss out on thousands of dollars of penalty relief simply because they don’t know about these programs or cannot navigate IRS bureaucracy.
Do tax relief companies work?
Although it is possible to negotiate with the IRS yourself, it is usually not a good idea. If you owe more than $10,000 or you’re facing a tax audit, you should hire a professional tax debt relief firm. The IRS may be underfunded, but don’t confuse lack of resources with incompetence.
In 2019, the IRS obtained 83 indictments and 99 convictions. The conviction rate for cases brought by Tax Division prosecutors for FY 2019 was 97 percent. Tax law is extremely complex. Just as with criminal law cases, it is rarely a good idea to represent yourself. When you deal directly with the IRS, it is easy to mistakenly provide self-incriminating information that can (and will) be used against you in an audit or criminal investigation. It would help if you had a team of professionals on your side.
If you owe a lot of money to the IRS, it can help to have a tax debt relief company on your side. Do tax relief companies really work? Do your homework. The best tax relief firms have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which company is the best fit for you.
What to look for when hiring a tax relief firm?
You’ve probably heard or seen advertisements from tax relief companies offering to help distressed taxpayers by reducing or even eliminating their tax debt. Even though many of these companies charge nonrefundable fees, which can be thousands of dollars, they may not deliver on their promises. Some of these companies even venture into scam territory by taking your money and then neglecting to send the IRS the necessary paperwork. The Federal Trade Commission has even received complaints that some tax relief companies have made unauthorized charges on top of the upfront fees.
Scammers know that owing tax debt to the IRS can make people desperate and that they can capitalize on your fear. While there may be legitimate tax-debt-relief companies, there are also plenty of scammers.
Signs of a scammer
The Federal Trade Commission says that a company demanding payment before doing anything for you is a sign of a scam. Here are some other indicators to look out for.
- Guaranteeing debt forgiveness.
- Promising to drastically reduce or even eliminate your tax debt.
- Pledging to get penalties and interest waived.
- Soliciting your business directly through letters or emails.
- Failing to assess your financial background.
- Using tactics that delay your case, such as repeatedly asking for the same documents.
- Informing you — after you’ve prepaid and waited a long time — that you no longer qualify for debt relief.
Signs of a legit tax relief company
Most legitimate tax relief companies:
- Have tax attorneys, CPAs, and enrolled agents on staff.
- Offer flexible payment options.
- Have a license to act as a power of attorney in your state.
- Are accredited by the National Association of Tax Professionals.
Not sure which company to hire? Check out our analysis on a few companies. You can also click here and get a free consultation with a tax debt relief firm that meets these requirements. The consultation is free, and there is no obligation to hire. At the very least, you’ll know what tax debt relief programs you qualify for.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.