If you are facing serious tax problems and need tax relief, you’re not alone. Every year, thousands of taxpayers discover they owe more in taxes than they can afford to pay. Many have no idea how they will ever repay their back taxes, especially when they’re already struggling to pay this year’s taxes. But there’s good news. The Internal Revenue Service (IRS) understands how burdensome tax debt can be. To help you get back on your feet, the IRS created tax relief programs, which pave the way to a debt-free lifestyle.
If you owe the IRS more than you can pay, this guide can help. By the end of this guide, you will understand what tax relief is, what options are available, and what steps to take to resolve your tax debt.
What is tax relief?
Tax relief refers to any program that reduces the taxes people owe, or develops a repayment plan they can afford.
The IRS estimates that $458 billion in taxes go unpaid every year. This is what the IRS calls the “tax gap:” the difference between what taxpayers owe and what they pay. Unfortunately, the U.S. government is in no shape to turn a blind eye. By 2018 federal budget deficit rose to $779 billion (a 17% jump from the prior year). Total federal debt is also on the rise, topping out at about $21 trillion in 2018.
To solve this “cash flow” problem, the IRS leverages a carrot-and-stick approach. The “stick” includes IRS audits, fines, liens and levies, garnishments, public auctions, and interest payments for taxpayers who pay late or don’t file their tax returns. Tax relief is the carrot.
If you have a tax debt, tax relief programs can help to ease your payment burden. Read on to learn more about them.
Why is the IRS willing to offer tax relief?
Tax relief is not charity. It’s a way to maximize the collection of tax revenue from taxpayers facing overwhelming debt.
The longer a tax account is delinquent, the less likely it is to collect anything at all. Giving some slack to taxpayers who are in financial difficulties is their best shot at getting at least some of what they’re owed.
This softer approach started in 1998, when the Senate enacted the IRS Restructuring and Reform Act (RRA 98). Lawmakers wanted the IRS to adopt a “liberal acceptance policy for offers to provide an incentive for taxpayers to continue to pay their taxes.” (Source) The purpose of the law was to give a fresh start to taxpayers who are sincerely trying to meet their obligations and remain in the tax system.
Threats that include interest payments, penalties and levies only work with taxpayers who have assets and income to lose. Incarceration is another powerful deterrent, but there simply aren’t enough prison cells to house every delinquent taxpayer. Tax relief programs offer an incentive to delinquent taxpayers to pay as much as they can afford and stay current with their taxes.
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, debt reduction, penalty relief, and tax representation.
Let’s dig deeper into each of these four programs.
Payment plans help individuals and businesses that cannot afford to pay their tax debt right away, but can afford monthly payments. This helps the IRS to get all the money they’re owed, and helps taxpayers to chip away at their debt at a scale they can afford.
Offer in compromise
Offer in compromise is available to taxpayers who cannot pay their entire tax debt or make monthly payments without it causing severe financial hardship. In such cases, if the taxpayer shows a willingness to cooperate, the IRS may either accept a smaller amount or cancel the debt entirely.
Penalty relief 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 is a right included in the Taxpayer Bill of Rights. If you are being audited, or you feel the IRS has made an error in your tax assessment, you can hire an authorized tax representative to help you negotiate. Tax representatives must be attorneys, certified public accountants, or enrolled agents. You can also employ an un-enrolled tax preparer if it was the person who helped prepare your taxes. These representatives use their expertise to ensure that the IRS treats you fairly, and that you receive the tax relief option that you deserve.
IRS tax relief programs
If you are behind on your taxes, don’t panic. You can still manage, reduce or even eliminate your tax debt. Read on to learn more about the IRS’ tax relief programs.
Offer in compromise
An offer in compromise is an agreement between you and the IRS to pay less than the full liability. If you think it sounds too good to be true, think again. The IRS has a 40% acceptance rate. Those figures include taxpayers who filed for themselves without tax representation. Among people who hired a tax professional, the rate is even higher.
Who qualifies for an offer in compromise?
There are three main reasons the IRS will agree to accept less than the full amount you owe in back taxes:
- Doubt as to collectibility: You don’t have the income or assets to pay your tax debt in full.
- Effective tax administration: You have the income to pay in full, but it would create a severe economic hardship.
- Doubt as to liability: The IRS has doubts about whether you actually owe the full amount of tax. As you probably guessed, this last reason is extremely rare.
Before you can qualify for an offer in compromise, you must satisfy the following requirements:
- File all the tax returns you are legally required to file.
- Receive a bill for at least one tax debt included in your offer in compromise.
- Be current with your estimated tax payments, if required to make estimated tax payments.
- If you are a business with employees, you must have made all required federal tax deposits up to the current quarter.
- Not currently filing for bankruptcy.
The offer in compromise option gets a lot of attention. For those that qualify, it could provide the best possible resolution. But it’s not for everyone.
- Pay a reduced liability.
- Suspension of collection actions of other creditors.
- Retention of certain assets.
- Stringent qualification criteria.
- Strict measures against noncompliance during, before and 5 yrs after the OIC program.
- Might require by the taxpayer to liquidate his/her assets.
- Temporary waiving of tax credits.
- Public record.
Payment plans let taxpayers pay off their debt through installment payments over a period of time. This helps taxpayers who can’t afford to pay their debt to minimize late payment penalties and interest.
This is the most widely used tax relief option. If your tax debt is below $50,000 ($25,000 for businesses), you can set up a monthly payment plan online, without ever having to deal directly with the IRS.
Another advantage of an installment agreement is you are not generally required to provide detailed financial statements or go through a thorough verification process.
But be warned: installment plans will not stop the IRS from charging you interest and late payment penalties. As of June 2016, the IRS underpayment interest rate is 4% and late payment penalties are 0.5% a month, up to a maximum of 25%.
Installment agreements can be a great option for tax resolution, especially if you are able to negotiate good terms.
- Prevents further IRS collection actions.
- Does not freeze the statute of limitation clock (debt can expire eventually).
- You’ll still owe the IRS and a tax lien might be filed.
- The IRS can remove your CNC status if you don’t file returns.
- Your CNC status can be revoked if you show an increase in income.
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.
But there’s a catch. While filed as Not Collectible, the IRS will continue to charge interest and penalties to your account. This option will also extend the statute of limitations (the 10 years the IRS has to attempt to collect taxes on a tax return) for the time your account is suspended.
However, the IRS will usually cancel the debt of taxpayers who are repeatedly granted CNC status if their situation is unlikely to change.
The pros and cons of CNC are specific to your ability to pay.
- You pay zero.
- Prevents further IRS collection actions.
- Readily available.
- Interest continues to accrue.
- May take longer to pay down debt.
- Need to keep track of payments.
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 can ask the IRS to waive a penalty because:
- An IRS agent gave you bad advice (either in writing or orally.
- A tax adviser gave you bad advice.
- You suffered a major disaster or emergency, such as a fire, hurricane, or earthquake, which affected a significant number of taxpayers in your area.
- It is the first time you ever received a penalty.
Qualifying for penalty abatement is not easy. You must meet very specific requirements. For instance, only taxpayers who have no penalties in the three previous tax years filed all required tax returns, and paid off any due taxes are eligible for first-time penalty abatements.
Penalties can spiral out of control. If you qualify for penalty abatement, it could mean significant savings.
- Penalties waived.
- Significant savings for those who qualify.
- IRS may want you to pay in full.
- Most do not qualify.
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. In some cases, the IRS will also file a “Notice of Federal Tax Lien” in the public record. This lets all your creditors know you owe money and the government has first dibs on your property. If this happens, the lien may appear on your credit report. This could damage your credit score for up to seven years, even after you pay off your debt.
Taxpayers can appeal a lien by requesting a judicial review within 30 days. They can also ask the IRS to withdraw the tax lien. This tactic is preferable because a lien withdrawal will also remove the lien from your credit report.
But tax lien withdrawals are not easy to get. Consider hiring an experienced tax relief company like Optima Tax Relief to help you fight a tax lien.
If the IRS has filed a lien against your property, a tax lien withdrawal may help.
- It allows you to sell your property.
- Removes the public Notice of Federal Tax Lien.
- Cleans up your credit report.
- Must pay taxes on the lien in full.
- Have to be current on estimated tax payments.
- Must have filed all tax returns for the past 3 years.
Levies are what happens when you’re unable to resolve your lien. Levies don’t just “make a legal claim to your property,” they actually take that property away. 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. Taxpayers can request the release of a levy by:
- Proposing an alternative payment method.
- Filing for bankruptcy.
- Claiming the levy creates serious economic hardship and you are unable to meet basic living expenses.
- Entering an installment agreement.
- Claiming the value of the property is much higher than the tax owed.
As you would expect, the IRS is not in a rush to return the property to delinquent taxpayers. Hiring a qualified tax professional is a smart move when trying to release a levy.
If the IRS has levied your property, a levy appeal may be for you.
- Save your property.
- Options for appeal can be complicated.
- Important to move quickly.
Filing a petition under the bankruptcy code can reduce or even remove your tax debts. Filing for bankruptcy also provides an automatic stay that temporarily stops all creditors, including the IRS.
So what are the downsides? Filing for bankruptcy extends the IRS’ statute of limitations for whatever time your accounts are frozen, plus an additional 180 days. You also must complete mandatory credit counseling with a government-approved agency for your bankruptcy to be approved. Then there is the fact that bankruptcies are a matter of public record and will remain on your credit report for 10 years.
The rules governing bankruptcy and tax relief are complex. Although bankruptcy is a powerful tax relief strategy, don’t try to do it by yourself. Always consult with a tax attorney. Not all taxes can be removed. For instance, payroll taxes and fraud penalties aren’t affected by bankruptcies.
Bankruptcy is a major decision that should be weighed carefully.
- It can reduce or even remove your tax debts.
- Temporarily stops all creditors.
- Extends the IRS statute of limitations.
- Mandatory credit counseling.
- Matter of public record.
- Negative impact to credit.
Innocent spouse relief
Innocent spouse relief is a powerful tax relief tool for those who are liable for their spouse’s IRS debt. To qualify, a spouse must prove that:
- Their spouse caused the tax understatement.
- They didn’t know about the understatement.
- It would be unfair to hold them responsible for it.
As with most tax relief options, the innocent spouse relief is governed by complex rules that vary from state to state. For instance, community property states like as Arizona, California, Idaho, and Louisiana, also require spouses to not have filed a joint income tax return and that all the understated income belonged to the guilty spouse.
Innocent Spouse is a great way to eliminate your tax debt. However, there are downsides to filing.
- Is an option even in community property states.
- Qualify if you have lived apart for 12 months.
- If denied, you’ll automatically be reviewed for Equitable Relief.
- Rules vary by state.
- It can take up to 6 months for IRS to review the claim.
- The former spouse will be notified.
- The former spouse can appeal the decision.
Although tax preparation is not a tax relief method in itself, it is a requirement for all tax relief programs. If you haven’t filed all the required tax returns, the IRS will not consider your applications for tax relief.
Whether the IRS estimated your taxable income or you made a mistake in your own tax forms, filing an amended return (IRS Form 1040X) can reduce your tax debt. However, filing past returns can be tricky. You may no longer have the records and receipts you need. Always consult with a tax professional before amending a tax return.
How to settle taxes with the IRS, using the tax relief plan
The first and most important step is to take action. Most tax relief programs work best when you are proactive as soon as possible. Remember, you want to look like a model taxpayer who is eager to resolve his or her tax debt but cannot afford to pay in full.
If you’re missing one or more tax returns, file them as soon as you can. The statute of limitations only starts to count when a tax return is filed. Waiting will just increase the penalties and interest you have to pay.
Find out what the IRS says you owe in back taxes and check whether you agree with the assessment. If you don’t understand something, ask. You have the right to a clear explanation of your tax assessment. If you’re not an accountant or tax attorney, you may want to talk to a tax relief professional at this stage.
Figure out how much you can pay without putting your life and home at risk. List what assets and income you have available. Deduct your monthly expenses. Don’t forget to consider other debts you need to pay, like your mortgage, auto loans, and credit card debt. Talk to a tax relief professional to decide which tax relief option is best for you.
How much will the IRS settle for?
The IRS will settle for the maximum amount you can afford to pay and is usually optimistic in its assessment of what you can afford. Sadly, this forces many otherwise productive taxpayers into bankruptcy. If the IRS thinks you can afford to pay the taxes in a lump sum, get a loan to repay it, or pay in installments, it will not settle. But the less money and fewer assets you have, the more likely you are to receive a tax settlement. The IRS considers four factors when assessing a tax settlement:
- Ability to pay (how much cash you have).
- Income (what monthly payments you can afford).
- Living expenses (how much you need to cover basic living expenses).
- Asset equity (what you can sell or use as leverage to borrow money).
If your income and asset equity after paying for basic living expenses is not enough to pay your tax debt, the IRS will consider a settlement.
There are plenty of gray areas when calculating your income, asset equity, and living expenses. A qualified tax relief professional can help you maximize your chances of getting approval without raising red flags with the IRS.
But be cautious: any information you provide the IRS to substantiate your request for an offer in compromise can be used against you. Consult with a tax professional before sharing financial information with the IRS.
How to negotiate with the IRS
The first thing you need to understand is the IRS is like any other lender or creditor. All creditors want one thing: to collect as much as they can from debtors, as soon as they can.
The IRS knows some taxpayers will never be able to pay all they owe before the 10-year statute of limitations on the collection of taxes. That means the IRS is willing to negotiate a settlement with taxpayers who can’t afford to pay their back taxes.
Tax laws are complex and every case is different, so there is no foolproof recipe to negotiating with the IRS. That is why the right to retain an experienced tax professional is so valuable. However, these general guidelines will improve your chances.
Guidelines for negotiating with the IRS
- Examine every piece of correspondence you receive from the IRS. Write out your tax problems. Is it just tax debt you’re struggling with? Or does the IRS want to further audit your tax account? You can only negotiate effectively with the IRS if you know exactly what you are facing.
- Respond to IRS requests before the deadline. If the IRS requires a response by a specific date, respond early even if you don’t provide all the required information. You want to show your eagerness to resolve your tax problems. Responding in time will also help minimize additional interest and penalty charges, and will preserve your right to appeal if you don’t agree with the IRS’s decision.
- Determine your tax liability. Recalculate past tax returns, particularly returns the IRS filed on your behalf. Hire a tax professional to help you find tax deductions you didn’t claim. If you reduce your tax liability, you can use that to offset the taxes you owe.
- File past due tax returns. Being up-to-date with your tax returns is a requirement for all tax relief programs. If you missed filing your tax returns for past years, do them now.
- Calculate what your basic living expenses are. Obtain receipts and other documents that substantiate your claims. The IRS will use your living expenses and income to determine eligibility for tax relief programs and to calculate what offer in compromise it will accept. Again, it is smart to have a tax relief professional help you prepare a budget that maximizes IRS allowances for living expenses.
- Hire a tax relief company. If you haven’t already, call a tax relief company to represent you before the IRS.
Should I hire a tax relief company?
You are never obligated to hire an attorney or accountant for any financial matter. Many people attempt to resolve their tax problems on their own, and many are successful. Most prefer the peace of mind and improved outcome that hiring a professional brings.
Facing the IRS alone can be a daunting task, particularly when you have substantial tax debt or your records are not in good order. Hiring a tax relief company can be helpful in bringing your tax problem to its best resolution. The right to hire a tax representative is part of the Taxpayers Bill of Rights for a reason. Here are a few of the benefits a tax relief company can provide:
- Tax professionals bring the hard-earned knowledge, strategy advice, and experience of dealing with the IRS for years.
- For the majority of tax debtors, an offer in compromise is not the best solution. Tax professionals can develop a plan that is best suited to your unique case.
- IRS auditors and collectors respect experienced tax professionals and are less likely to question their claims. They prefer dealing with them because it makes their jobs easier.
- Tax professionals can take care of most interactions with the IRS, which will save you time. It will also neutralize the intimidation factor an IRS agent may otherwise hold over you.
- Tax relief professionals know what deals can be made with the IRS and how to maneuver around the IRS bureaucracy.
- Tax professionals can protect you from disclosing too much information to the IRS.
How to choose the right tax relief company
It’s essential that you choose a reputable tax relief company. As with every industry, some are better than others. These guidelines will help you discern the serious offers from the scams:
Only hire tax relief companies that have tax attorneys on staff.
Choose tax relief companies that employ certified public accountants (CPAs), tax attorneys and enrolled agents. Ask how many tax professionals it has on staff. Find out whether the IRS approved the company as a continuing education provider. Continuing education providers have the authority to train tax professionals.
Find out if the company is accredited by professional associations, such as the National Association of Tax Professionals.
How long has the company been in business? How many years’ experience do the tax attorneys, CPAs and enrolled agents have?
Power of attorney
Confirm the IRS licensed your tax relief company to act as a power of attorney in your state.
Check user reviews of the company
Read user reviews on the company before you hire its services. Although it is not a guarantee of excellence, avoid companies with multiple unresolved complaints from users.
Tax relief companies typically employ tax attorneys and enrolled agents. The cost of their services can add up. Many tax relief companies offer payment plans for their fees. Look for a tax relief company that provides flexible payment options.
Start with companies that offer a free initial consultation. Ask to speak to the person who will be handling your case.
Ask about fees
Avoid surprises by requesting an estimate for the services you will receive.
Only employ tax relief companies that are financially sound. Where are their offices located? How many tax professionals do they have on staff?
What services does the tax relief provide? Can the company handle bankruptcies? Will it help with tax preparation? What about state taxes?
Some “tax relief companies” are just the front-man. Confirm that your case will be handled by the company you hire and not outsourced to a third party.
Avoid unrealistic promises
Be skeptical of companies that promise to reduce your tax debt by amounts such as 80% without knowing the particulars of your case.
Get help if you need it
SuperMoney can help you find a tax relief company qualified to help with your tax problems. We review tax relief companies based on the criteria above and categorize them by their areas of expertise. We only recommend nationwide companies that possess all of the above qualifications.
FAQ on Tax Relief
How do tax relief services work?
Tax relief can allow you to break down your debt into payments or reduce the amount of tax you pay to the government. In some cases, your tax debt could be forgiven.
This is how it usually works. A team of tax experts meet and investigate your tax situation to determine what major tax issues you’re facing and which solutions provide the best chances of success. Common strategies include requesting an offer in compromise, an installment agreement, penalty abatement, innocent spouse relief, or claiming currently not collectible status. Once they choose a strategy, they negotiate with the IRS or your state revenue department until there is a resolution.
How do you qualify for tax relief?
Eligibility requirements vary depending on the tax relief program you apply for. However, tax relief firms can’t guarantee you will qualify for a tax relief program. Only the IRS or a state comptroller can make that decision. If a firm claims they can guarantee a certain outcome, they are probably a scam. Reputable companies usually offer potential clients a free initial consultation where they discuss options and determine which tax relief programs they may qualify for. Typically, taxpayers who owe more than they can afford to the IRS may qualify for a tex relief program if they are up-to-date with filing their tax returns. Some tax relief companies will help you with filing missing tax returns.
Does tax relief hurt your credit?
Agreeing to pay a tax bill by an installment agreement with the IRS doesn’t affect your credit since installment agreements are not reported to the credit reporting agencies.
What is the IRS Fresh Start Program?
The IRS Fresh Start Program is a program that is designed to allow taxpayers to pay off substantial tax debts affordably over the course of six years. Each month, taxpayers make payments that are based on their current income and the value of their liquid assets.
Does the IRS forgive tax debt after 10 years?
In general, the Internal Revenue Service (IRS) has 10 years to collect unpaid taxes. After that, the debt is wiped clean from its books and the IRS writes it off. This is called the 10 Year Statute of Limitations.
Ready to get started?
Are you ready to take a swing at eliminating your tax debt? The first step is to do some research. A certified tax relief professional can help you to make sense of your situation and to find the right tax relief program for you. Click here to view side-by-side comparisons of top tax relief firms, and you’re on your way to a debt-free future.
Miron Lulic is founder and CEO at SuperMoney, a service that helps millions of people transparently compare financial services such as loans, investments, and more.