What Is Tax Relief?

happy business person after tax relief

A relatively recent government study showed that more than 20% of tax filers had a 2018 IRS tax bill. This means that one out of every four Americans may not have had enough taxes withheld in the 2018 fiscal year. Things can get quite challenging for taxpayers who owe taxes but have no money to pay their tax bill(s). When that happens, the IRS may offer several tax relief options to help you get out of this unpleasant situation as pain-free as possible.

In this guide, we give you all the details about what tax relief really is, how it works, how much of your due taxes you might be able to reduce, how we can help you find the appropriate tax relief plan for your particular situation, and more.

What Is Tax Relief?

Tax relief is an arrangement where you either negotiate a settlement with the IRS or set up a payment plan with them. So in the end, you get to reduce the tax amount you pay to the government or break down your debt into payments. However, note that this is NOT about relieving you from your tax obligations. It will NOT eliminate your tax bill, either. Nevertheless, it IS a convenient (and much more manageable) way to pay the tax debt you owe to the government.

The IRS also offers special tax relief to victims of natural disasters, such as wildfires and hurricanes. This could include deadline extensions or enable those eligible for tax relief to claim casualty losses on their tax returns. The recent coronavirus pandemic has also forced the government to take tax relief measures for businesses, families, and individuals.

Some states also have tax relief programs for vehicles locally registered within their state borders. You may also find tax relief programs that offer a deferral or exemption of real estate taxes for qualified homeowners that meet certain eligibility criteria.

How Does Tax Relief Work?

You can get tax relief via several different ways, such as tax deductions (i.e., home mortgage interest), exclusion, and credits. Tax liens may also be forgiven – this is quite rare, though. The goal of a tax relief program is to reduce the tax liability of an individual taxpayer or a business. It may also target specific taxpayers, such as those that have suffered material loss due to a natural disaster.

Some forms of tax relief are:

  • A tax deduction that lowers a taxpayer’s taxable income. 
  • A tax credit that reimburses taxpayers for certain expenditures. It is subtracted from the taxpayer’s overall sum of due tax after making all the deductions.
  • A tax exclusion which reduces the taxpayer’s reported gross income amount.

There is also the Fresh Start Program that enables taxpayers to pay reduced tax amounts over time. This applies to outstanding tax debts. 

Tax Relief Options

Below are three strategies/options to help you manage the taxes you cannot pay in full by the given deadline. 

  • The Repayment Plan

You might be allowed to break your balance down into smaller payments. This could be a short-term (paying over in less than 120 days) or a long-term payment plan, depending on the sum you owe in combined taxes, interest, and penalties. So, for debts $50,000 or less, you may qualify for a short-term payment plan while long-term payment plans can include tax bills that reach $100,000 or more. 

A payment plan is an agreement you make with the IRS to repay your due taxes by a certain deadline. Also, note that the IRS applies a user fee to those that qualify for a long-term installment agreement/payment plan in the following situations:

  • If you enable automatic monthly payments from your checking account, you will be asked to pay $31 for online application and $107 if you apply in-person, by mail, or phone. Low-income individuals are excluded from setup fees. This plan is also called the Direct Debit Installment Agreement. 
  • If you decide you want to make monthly payments from your savings/checking account (Direct Pay), then the setup fee for online applications is $149 and $225 if you apply in-person, by mail or phone. The same applies to monthly payments made using the Electronic Federal Tax Payment System (you will need to enroll first), either by phone or online. For low-income individuals, this fee is set at $43, which could be waived if they meet certain conditions. If you prefer to pay via your credit/debit card, some extra fees may also apply, depending on the card issuer. 

In both cases, you should add accrued interest and penalties to the applicable fees until you pay the balance in full. So, this may, indeed, be a helpful plan to consider if you don’t have the money to cover your entire tax bill. However, you should also take into account the fact that setting up the payment plan involves additional fees. 

  • Offer in Compromise

You might be given the chance to pay less than the due amount with an Offer in Compromise tax relief program. So, you may not need to pay your full tax bill if you meet certain criteria. It is important to be able to prove that paying your full tax liability “creates a financial hardship for you” per the IRS description of the program. To determine whether you are eligible for this particular tax relief program, the IRS will probably go through your assets, expenses, income, and ability to pay. 

You could check out if you qualify for this program by using the IRS Offer in Compromise Pre-Qualifier tool. You can find much more details on the Offer in Compromise page. 

  • Penalty Relief

This is an IRS program that opens the way for penalty relief. In other words, whatever penalties have been imposed on your tax bill can be forgiven if you fulfill some conditions.  Among the criteria the IRS uses to evaluate whether you might be eligible for penalty relief is:

  • Arranging payment for the due taxes.
  • Paying for any taxes owed.
  • Not having any penalties for the past 3 years.

Note that even if you qualify, you will still need to pay your taxes, unlike with the Offer in Compromise program. The difference is that after the penalties are removed from your balance, you will then owe less. You may qualify for it if your inability to meet your tax obligations derives from circumstances that are beyond your control, such as a death in the immediate family, a natural disaster, or a house fire.

Note: Getting a personal loan is also an alternative way to help you pay your taxes. This option should be used as a last resort, though, if you don’t have the money to pay your tax bill. In this case, do ensure that the personal loan you secure gives you the best possible rates and that these rates are less than an IRS payment plan/program. To determine that, make sure you conduct your own research on things like personal loan terms and rates. 

And, don’t forget to check your credit reports so that you know what your financial profile looks like. The tax bill you owe the government will not show on your credit reports (so having unpaid taxes doesn’t affect your credit score), but they may be included in public records reports. 

What Do Tax Relief Companies Do?

A tax relief company negotiates with the IRS on your behalf, utilizing their expertise in the area of taxes and tax laws. Of course, this is not a free service. However, it saves you time and worries since these companies handle hundreds of cases every year and know exactly how to work out the best deal between you and the IRS. 

Struggling taxpayers, therefore, can benefit from the experience of these tax relief professionals. At the same time, though, nothing is guaranteed, and you may end up with an unsuccessful outcome. For that reason, it is best to trust respected organizations with a proven track record of successful negotiations with the IRS.   

Note that not all tax relief companies have the authority to become your voice and try to make a financial arrangement with the IRS on your behalf. These tax professionals should either be tax attorneys, certified public accountants, or federally authorized Enrolled Agents that have been given the role of representing taxpayers before the IRS. 

Some of the things you definitely need to pay attention to when considering using a tax relief company are:

  • Any default billing rates that may apply (these are usually activated if you cancel their services).
  • Any upfront fees.
  • The applicable refund policy (some agencies offer unfavorable refund policies for the taxpayer). 

When you book an in-person or over-the-phone meeting with the selected tax professional, feel free to ask as many questions as you feel necessary until you gain a full understanding of your options and the company’s fee structure. Proceed once everything checks out and based on your research you’ve found them to be a trustworthy company.

How Much Tax Relief Can You Get?

How much tax relief you can get depends on your particular case and the program you qualify for. You see, there is a wide range of tax relief programs you might find useful and each one offers a different type of tax relief. For instance, if you are eligible for the Earned Income Tax Credit program (applicable to low-to-moderate income earners), you may have your due tax amount reduced to zero (or even lower and the IRS may owe YOU!). 

So, our advice is to give us a call or request a free tax consultation and have your options assessed by one of our qualified tax professionals. And, if you do qualify for a tax relief program, rest assured that our experienced staff will negotiate the best possible outcome for you with the IRS so that you can finally heave a sigh of relief.

What Causes An IRS Audit and How to Handle It

woman looking at tax bill

Round numbers, deduction overkill, and math mistakes can raise some red flags that may bring the IRS knocking on your door, wanting to double-check your numbers to ensure you don’t have any return-related discrepancies. Whether an IRS or state audit, there is no reason to worry, provided that you are telling nothing but the truth and that you aren’t trying to cheat the system.

However, an IRS audit may also be conducted if you feel that you are paying more than you owe. In any case, this guide will help you understand the fundamental reasons why you could get audited by the IRS, how to deal with an audit, and how to deal with it quickly and effectively. 

What Causes an IRS Audit?

The IRS audits taxpayers as a means to reduce the difference (aka tax gap) between what the IRS receives and the money it is owed. The IRS may conduct an audit if they suspect that the reported amount of tax is not correct, be it for an individual or business. Some other times, though, these audits are random. Below are seven primary concerns/red flags that could put you or your business under the IRS microscope. 

  1. Making math mistakes.  It is paramount that you or the person that files your taxes NEVER make a math error. An “oops, I wrote 8 instead of 3” or “I got distracted and forgot to include a zero” will not help you. Although to err is human, it will be best if you could avoid making one when it comes to filing your taxes. So, always double-check (triple-check if needed) to avoid the hefty fines later on. You can be assured that the IRS will not care the least bit if the mistake was accidental or innocent.
  1. Not reporting part of your income.  If for whatever reason, you decided to keep under wraps an activity of yours that made you money, such as a freelance job, then you are probably asking for trouble. You see, submitting your W-2 form and refraining from including your freelance income from your Form 1099 leads you absolutely nowhere. This is because the person to whom you did the freelance task has probably already sent a copy of your agreement to the IRS. So, the IRS knows about your income, whether you report it or not. It is just a matter of time to discover that you have withheld from reporting non-wage income. The same applies to interest and stock dividends as well.
  1. Reporting false donations.  Making a considerable contribution to charity can get you a significant tax deduction. Claiming too many charitable donations, though, without being able to produce the proper documentation, will put you at a tough spot for sure. The IRS WILL notice that you claim $15,000 in charitable deductions on your $35,000 salary.
  1. Reporting personal expenses as business expenses.  This applies to self-employed, who report too many losses on their Schedule C to hide income. And, if you don’t yet have a clear idea of what business expenses are deductible, you can check out the IRS Publication 535 page.
  1. Reporting too many business expenses.  Deducting too many expenses for purchases you made that are not necessary or ordinary to your business WILL raise some eyebrows at the IRS offices. Better stick to reporting purchases that are (1) appropriate for the business or trade and (2) accepted and common in the business or trade. If, for example, you are a lawyer and feel like painting your apartment, don’t claim paint and paintbrushes. Neither meets the requirements mentioned above.
  1. Claiming excessive home office deductions.  To be eligible for a home office deduction, it is crucial that you use part of your home regularly and exclusively for your business or trade. This means that you can give yourself deductions for home office expenses only if you have a designated section in your home that is strictly used for business purposes.
  1. Rounding up numbers.  Try to be as precise as possible when you make your calculations. Also, steer clear from making estimations and doing things like rounding to the nearest hundred.  A much better practice is to round to the nearest dollar instead. If all of the numbers you enter for expenses are even numbers, it will raise some eyebrows and may force the IRS to request some proof of those expenses.

Other surefire ways to attract an audit if you are a business owner is to try to claim more expenses than justified by filing a dubious expense claim while also reporting a loss. The IRS will probably notice this attempt to have a lower tax liability. 

What Are the Chances of Being Audited?

According to IRS statistics, people who report zero income (but occupy the higher tax brackets) get the most attention from the IRS. However, it should also be noted that in recent years IRS audits have decreased in number. This has to do with the smaller IRS workforce and declining budgets. This, of course, does not mean that receiving an audit letter is out of the question. 

That being said, most audits are conducted for people of income above $200,000, as well as those missing data on their return. The same applies to individuals or businesses whose returns are way above the average or normal, based on the IRS statistical data on the typical amounts for various income levels and professions. 

Another point to consider is that audits related to missing data and math errors are usually initiated by mail rather than in-person by an IRS agent. Our experience has shown that the average payment tied to correspondence audits is below $7,000. More complicated issues may require a field audit, which usually ends up with the taxpayer owing more money to the IRS (around $20,000). 

How to Handle an IRS Audit

The first thing to understand is that the IRS may conduct a field audit, an office audit, or a correspondence audit, based on the severity of the problem. The most thorough type of audit is the field audit, whereas the correspondence audits only require smaller things, such as clarification on a particular area of the tax return.   

In any case, it is paramount to handle the audit respectfully and carefully – always with the assistance of your tax professional, who will know what information should be withheld and what information should be released. If possible, allow your tax professionals to act as a buffer by having the field audit conducted at their offices. 

In the event you receive an audit letter, it is best to forward it to your tax professional, who will then take it from there and deal with the tax auditor(s). After all, they have experience in dealing with the IRS and audits. If though you decide to take matters into your own hands, it is highly probable that you will say something that might trigger the IRS to open up more areas of your return for inspection. 

Do take an audit seriously, without fretting or panicking, and remember that not all audits turn out adversely for the taxpayer. To help minimize any negative impact on your business, you should do the following: 

1. Organize your accounting records from the past 6-7 years with the assistance of your tax professional. This includes everything from leases, hard copies of tax-prep data, and accounting books to canceled checks, expenses, and bank statements. 

2. Only answer to the auditor’s question about your tax return in a clear and straightforward way (not making excuses). Do not volunteer any other information, though, or provide accounting records that have not been requested from you. 

3. Let your tax professional handle things for you. They know exactly what to do, what to say, what not to say, and why. 

4. Only provide copies, not the originals. There is a high likelihood that your original documents get misplaced or even lost if you hand them over to the agent. The IRS will take no responsibility for losing your documents during an audit because this is part of your obligations. For that reason, either give copies or ask the IRS agent to copy the originals and then give them back to you. 

5. Know your taxpayer rights, the law that is supporting the deductions you claim, and the audit process. Although it is advised to try to settle any differences you may have with the agent at the audit level, you could escalate things and ask for a conference with the IRS Appeals Division. Or you could simply hire an experienced tax professional to argue your case in a way that will bring the best results for you. Given how complex the tax code has become, having a qualified tax pro by your side is definitely worth their fee to help you. 

Are you facing an audit or want to act proactively and stay on the safe side? We have your back. Just give us a call or get in touch with us for a free tax consultation. Our team of qualified and experienced tax professionals will help you get out of an unpleasant situation and ensure that you never find yourself there again.

What Is The IRS Offer In Compromise?

IRS Offer In Compromise form

Offer in Compromise is an IRS program that enables taxpayers to get a fresh start with the Internal Revenue Service. In doing so, they have the chance to settle their tax debt for less than the overall amount of money they owe. Therefore, if you are struggling to pay your federal or state tax debt, this could be a useful program to consider. In 2018 alone, the IRS accepted around 24,000 offers (up 24% from 2010) while rejecting just as many.

So, how can you determine if Offer in Compromise (OIC) is an initiative that could solve your tax issues? How can you get an offer accepted? How much should you offer to the IRS? We give you all the necessary details and answer these concerns below.

How Much Should I Offer in Compromise to the IRS?

This is perhaps one of the most challenging parts of submitting an Offer in Compromise. On the one hand, you don’t want to come forward with an unrealistically low offer that could ruin your acceptance chances. On the other hand, you do aspire to pay as little as possible to the IRS so that you can finally settle your tax debt. Given that each case is different, there is really no magic formula. In fact, it requires a lot of experience to be able to recognize when an offer is too low.

That being said, there ARE some ways to get some idea of how much is probably enough when you make an Offer in Compromise. Let’s start with the basics – the bare minimum offer sum. Note that it will NOT guarantee that your offer gets accepted by the IRS. It will, however, give some confidence that your offer is in the right ballpark.

What the IRS is primarily focused on is to receive offers of at least the same amount of the taxpayer’s Reasonable Collection Potential (RCP). This is a number the IRS uses to determine your ability to pay the owed taxes, and takes into consideration several liabilities, such as your:

  • Assets
  • Monthly living expenses
  • Monthly income

So, generally speaking, you can begin with an estimate of 12 months’ worth of your disposable income. Then, calculate any additional cash you can get from selling valuable assets and submit an offer with an amount higher than your RCP. This is critical, especially if you are planning on submitting an Offer in Compromise on the basis that you are unable to pay the due tax (as opposed to Effective Tax Administration or Doubt as to Liability).

The problem lies in calculating your Reasonable Collection Potential. Here are some steps to follow:

  • Estimate the income you have from all sources within a month and then subtract the full sum that corresponds to your living expenses (the necessary ones only, such as car payment, groceries, utilities, rent, etc.). The number you will get is your monthly disposable income.
  • Multiply your monthly disposable income by 12 to get your annual disposable income.
  • Add to that amount any assets that you could sell, such as valuable collectibles, investments, and an extra car. At this point, note that determining how much these assets are worth is a point of negotiation with the IRS for many taxpayers.

The result of these calculations will give you the bare minimum you can offer.

Should You Pay Installments or All At Once?

Many taxpayers wonder if they should pay the offer amount in installments rather than with one lump sum payment. Although the IRS enables monthly payments for this purpose, it is best to pay the offer in fewer than five monthly installments if it is possible. This is because the IRS will use 24 months of your disposable income for anything beyond five installments to calculate your Reasonable Collection Potential (with five or fewer installments, they will use 12 months of your RCP). If that happens, the amount the IRS will want from you will essentially double.

How To Get An Offer in Compromise Approved

As already mentioned, the IRS is highly likely to turn down offers that do not meet (even better, exceed) the taxpayer’s RCP. That being said, some factors play a leading role in making an Offer in Compromise quicker. These include:

  • Low Income W2 Earnings – You make less than $30,000 annually, and your only income source is a wage-earning job.
  • Fixed Retirement Income – You are a 55+ years of age retiree and receive a fixed income.
  • Social Security/ Disability Income – You only get a Disability or Social Security income.

Some factors, on the other hand, can contribute to longer-than-average decisions about your Offer in Compromise, such as:

  • High Balance – Offers with balances $25,000+ usually take much longer to process than those with lower balances.
  • Self-Employment – The IRS conducts in-depth research on your expenses, making sure you don’t mix your personal and business expenses.
  • Initial Rejection – If you have already submitted an offer that got rejected and want to have it reevaluated, you could be adding up to six more months to the overall procedure.
  • Other Circumstances – If you own multiple vehicles, have lots of loans, or many different deposits all over the place, you will need to do some explaining to the IRS. This pushes the process further back in time.

So, is everything lost? Not at all. You can still boost the Offer in Compromise process by doing the following:

  • Ensure you have all the necessary details – The IRS will request things like bank statements. Check that the ones you submit have all the pages, even those that you may find useless (i.e., a blank page). Then, send your Offer.
  • Provide good explanations – If your financials, for some reason, does not look right, make sure that you give a sound reason for it in the cover letter.
  • Reply fast and accurately – It is paramount that you respond to IRS requests for further clarification as timely as you can. The information you provide should also be accurate.
  • Propose the presumed maximum amount of money – The IRS expects to collect some money from you within a reasonable time period. Offering them the max sum of the presumed amount will most likely get your offer approved

To get there, ensure that you have filed all tax returns, made the required estimated tax payment for the current year, and include a bill of one or more tax debt in your offer. Business owners with employees must have made the needed federal tax deposits for the current quarter.

Besides what is reported to Form 433-A, the IRS will investigate several other factors, such as your level of education, age, asset equity, expenses, income, Collection Statute Expiration Date, and, of course, your lifestyle. If something about the way you live is contradictory to the fact that you are unable to pay your taxes, the IRS may reject your offer.

How Can I Submit An Offer In Compromise Application?

To apply for an Offer in Compromise, you will need the following Offer in Compromise Forms:

    • Form 656 – You need this to make your offer.
    • Form 433-A – This Collection Information Statement for Wage Earners and Self-Employed Individuals helps the IRS determine whether you are facing financial strain and to what extent.
    • Form 433-B – This is the same as with Form 433-A with the difference that it is a Collection Information Statement for Businesses. It serves the exact same purpose as Form 433-A.

Common Mistakes to Avoid when Filling out your OIC Application

The IRS will get all the information they need about your financial situation from Form 433-A (see above). It is, therefore, crucial that you ensure you don’t make any math errors on that form, although the form indeed requires a considerable amount of complex calculations. You certainly don’t want to put your OIC process to a halt to have incorrect calculations sorted out.

Other mistakes on OIC forms we usually see and either cause confusion or have a dramatic impact on a case are as follows:

  • Leaving empty/blank spaces – Never leave a field on a 433 or 656 empty. It is best to write “N/A” in these spaces.
  • Writing negative equity – It is essential that any negative equity is reported as zero. Many tax accountants subtract the negative equity from the taxpayer’s NRE (Net Realizable Equity) when the taxpayer’s asset (property, in this case) is worth less than they owe on it, which is wrong.

 

How Long Does It Take To Get a Response From the IRS?

Although there are no set timelines for exactly how long it will take the IRS to decide whether to reject or approve an Offer in Compromise, our experience has shown that it usually requires between 4-9 months. However, some more complex Offers in Compromise may need much more time to get resolved, which could reach 48 months from the day the OIC process was completed, which usually takes roughly 6 months. The most common factors that could drag a response from the IRS are related to self-employment. Regardless, the IRS does respond within two years.

If the IRS accepts your offer, you need to stick to your part of the deal and pay the agreed sums. Now, if your offer gets rejected, know that you can file an appeal via Form 13711 (hence, renegotiate your OIC under more favorable terms) within 30 days of the rejection notice date.

Is an Offer In Compromise the Best Option for You?

Although an Offer in Compromise is an excellent collection solution, it is not the only option you could consider. To determine that, you will need to have a trusted tax professional evaluate your tax situation, the IRS collection alternatives, and your personal finances as a means to develop the optimal approach to repay your debt. Don’t hesitate to call or contact us for a free tax consultation to see how we can help you get out of debt as painlessly and swiftly as possible while negotiating the best terms for you.