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.
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.