If you are facing serious tax problems, take heart. You are certainly not alone. Every year, thousands of taxpayers discover they owe more taxes than they can afford to pay. Many have no idea how they will ever repay their back taxes, especially when they are struggling to pay this year’s taxes. The good news is the Internal Revenue Service understands tax debt can be an overwhelming burden and has created tax relief programs designed to help taxpayers get back on track.
If you owe the IRS more than you can pay immediately, this guide can help you understand what tax relief is, what options are available and the steps you need to take to resolve your tax debt.
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.
Americans owe a total of $458 billion in federal taxes, according to the latest IRS estimates. (Source) It 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. The tax gap ($458 billion) is close to the 2016 federal budget deficit of $534 billion, which is a drop in the ocean compared to the total federal debt ($19.5 trillion as of June 2016).
To solve this “cash flow” problem, the IRS has been instructed to use a carrot-and-stick approach. The stick includes IRS audits, hefty fines, 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, and the IRS has contacted you, there are various tax relief programs you can use 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, not by a long shot. Tax relief is a way to maximize the collection of tax revenue from taxpayers facing overwhelming debt.
The IRS knows that the longer a tax account is delinquent, the less likely it is to collect anything at all, so it is willing to give taxpayers who are in financial difficulties some slack if they show a willingness to resolve their tax debt.
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 all the delinquent taxpayers. 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.
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.
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.
This section briefly describes the main tax relief plans available to taxpayers.
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.
If you think it sounds too good to be true, think again. In 2015, 66,600 offers in compromise were submitted to the IRS, and 28,305 were accepted. That’s a 40.3% acceptance rate. (source) Those figures include taxpayers who file for themselves without tax representation; The acceptance rate is higher for people who hire tax professionals.
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. (Source) 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.
Warning: 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%.
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.
The catch is the IRS will continue to charge interest and penalties to your account. Another thing to consider is that the statute of limitations (the 10 years the IRS has to attempt to collect taxes on a tax return) is automatically extended 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.
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:
- 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. For instance, first-time penalty abatements are only granted to taxpayers who have no penalties in the three previous tax years, filed all required tax returns, and have paid or made arrangements to pay any tax due.
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 to let 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, which could damage your credit score. Even if you pay your tax bill, the lien can remain for several years.
Taxpayers can appeal a lien by requesting a judicial review within 30 days. They can also request the IRS to withdraw the tax lien. This tactic is preferable, because a lien withdrawal will also remove the lien from your credit report. Tax lien withdrawals are not easy to get. Consider hiring an experienced tax relief company to help you fight a tax lien.
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.
Taxpayers can request the release of a levy by:
- Proposing an alternative payment method
- Filing for bankruptcy
- Claiming the levy creates a 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 property to delinquent taxpayers. Hiring a qualified tax professional is a smart move when trying to release a levy.
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.
The downside of filing for bankruptcy is it 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 extremely 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 are not affected by bankruptcies.
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.
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, such 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.
Although tax preparation is not a tax relief method in itself, it is a requirement for all tax relief programs. If you have not filed all the required tax returns, the IRS will not consider your applications for tax relief. Sometimes the IRS will file returns for you and estimate what your taxable income was. Or maybe you filed it yourself and then realized you made a mistake that increased your tax liability. Filing an amended return (IRS Form 1040X) can drastically reduce your tax debt.
However, filing past returns can be tricky, as you may no longer have the records and receipts you need. Always consult with a tax professional before amending a tax return.
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.
How to settle taxes with the IRS, using a tax relief plan
The first and most important step is to take action. Most tax relief programs work best when you are proactive and work to resolve the issue as soon as possible. Remember, you are trying to portray the image of a model taxpayer who is eager to resolve his or her tax debt but cannot afford to pay in full.
If you are 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 realistically pay. List what assets and income you have available. Deduct your monthly expenses. Don’t forget to consider other debts you need to pay, such as a mortgage, auto loans and credit card debt.
Talk to a tax relief professional and decide which tax relief option is best for you.
How much will the IRS settle for?
The IRS will settle for the maximum amount it feels you can afford to pay, and is usually rather optimistic in its assessment of what you can afford. Sadly, this means that many otherwise productive taxpayers are forced into bankruptcy.
If the IRS thinks you can afford to pay the taxes in a lump sum, obtain a loan to repay it or pay in installments, it will not approve a settlement. Obviously, 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:
- Your ability to pay: How much cash you have
- Your income: What monthly payments you can afford
- Your 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 (using the equation: Income + Asset Equity – Living Expenses
As you can imagine, there are plenty of gray areas as well as wriggle room when calculating your income, asset equity and living expenses. A qualified tax relief professional can help you maximize your chances of getting an approval without raising red flags with the IRS.
Warning: Any information or documents 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 additional financial information with the IRS.
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:
1. Doubt as to collectability: You either don’t have the income or assets to pay your tax debt in full.
2. Effective tax administration: You have the income to pay in full, but it would create a severe economic hardship.
3. 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:
1. File all the tax returns you are legally required to file.
2. Have received a bill for at least one tax debt included in your offer in compromise.
3. Be current with your estimated tax payments, if required to make estimated tax payments.
4. If you are a business with employees, you must have made all required federal tax deposits up to the current quarter.
5. Not currently filing for bankruptcy.
How to negotiate with the IRS
The first thing you need to understand is the IRS is like any other lender or creditor. Sure, your garden-variety lender does not have the power to garnish your wages or levy your bank account, but all creditors from loan sharks to credit unions and cable companies are interested in one thing: collecting 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 isn’t a 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 of negotiating successfully with the IRS:
- Examine every piece of correspondence you receive from the IRS. Write down the tax problems you are dealing with. Is it just tax debt? Or does the IRS want to further audit your tax account? You can only negotiate effectively with the IRS if you know what tax problems you are facing.
- Respond to IRS requests before the deadline. If the IRS requires a response by a specific date, respond even if you don’t provide all the required information. You want to show you are motivated 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.
Remember to consult with a tax relief professional before providing additional information and documents. All the documents you send the IRS can be used against you.
- Determine what your tax liability is. Recalculate past tax returns, particularly returns the IRS may have 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 that you do 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 calculate what offer in compromise it is prepared to accept. Again, it is a smart move 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 that is qualified to represent you before the IRS.
How can tax relief companies help with your tax problem?
Facing the IRS alone is not advisable, particularly when you have substantial tax debt or you’re been audited and your records are not in good order. The right to hire a tax representative is part of the Taxpayers Bill of Rights for a reason. The key is to find the right tax relief company. These are some of the benefits a tax relief company can provide:
- Tax professionals bring with them the hard-earned knowledge, strategy advice, and experience of dealing with the IRS for years, sometimes decades.
- 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 and they don’t get as “emotional” during interviews.
- Tax professionals can take care of most interactions with the IRS, which will save you time and 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
Choosing a reputable tax relief company can be a daunting task. As with every industry, there are unscrupulous companies that will happily take your money without providing any real help.
These guidelines will help you figure out the good guys from the bad guys when choosing a tax relief company:
Tax attorneys: Only hire tax relief companies that have tax attorneys on staff.
Expertise: 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 company has been approved by the IRS as a continuing education provider. Continuing education providers are authorized by the IRS to train tax professionals.
Professional accreditation: Find out if the company is accredited by professional associations, such as the National Association of Tax Professionals.
Experience: 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 tax relief company is licensed by the IRS to act as a power of attorney in your state.
BBB accreditation: Although it is not a guarantee of excellence, avoid companies that are not accredited by the BBB or have a bad BBB rating.
Payment options: Hiring the services of tax attorneys and CPAs don’t come cheap. Choose companies that provide flexible payment options.
Free consultation: Start with companies that offer a free initial consultation and 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.
Financial strength: Only employ tax relief companies that are financially sound. Where are their offices located? How many tax professionals do they have on staff?
Services: What services does the tax relief provide? Can the company handle bankruptcies? Will it help with tax preparation? What about state taxes?
In-house representation: Some “tax relief companies” are just marketing companies. Make sure to check that your case will be handled by the company you hire and not outsourced to a third party.
Beware of 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.
SuperMoney can help you find a tax relief company that is qualified to help with your tax problems. We have reviewed tax relief companies based on the criteria above and categorized them by their areas of expertise. We only recommend nationwide companies that:
- Have a proven track record
- Have tax attorneys on staff
- Are accredited by the BBB/
- Provide payment options and reasonable fees
- Are financially sound
To find out what tax relief programs you qualify for, click here to receive a free initial consultation with a tax professional.