$10K in Tax Debt?
Are you in tax debt and looking for a solution to take back control of your life? We can help you! speak with a tax attorney about your options.
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What Is Tax Debt Relief?
Tax debt relief is designed by the Internal Revenue Service (IRS) to help lower a taxpayer or business owner’s tax bill. There are several types of tax debt relief programs, typically in the form of payment plans or partial or full debt settlement.
There are many situations that could allow you to qualify for tax debt relief, such as an unexpectedly high tax bill, a natural disaster hitting your home and making it difficult to file taxes and pay your bill, or other financial hardships. The important thing is if you need tax debt relief, you must act quickly to find a solution.
If you fail to pay your tax debt, the IRS will charge a failure-to-pay penalty of 0.5% of your unpaid taxes per month, plus interest (which starts accruing the day your taxes are due and continues until you pay your bill in full). If you delay payment long enough, you could pay up to 25% of your unpaid taxes in penalties.
How does tax debt relief work?
Essentially, tax debt relief is incentives and programs designed by the IRS to lower a taxpayer or business owner’s tax bill. Examples include tax credits and other temporary incentives, allowable deductions for pension contributions and tax debt forgiveness and the removal of any tax liens. Your specific tax situation will determine the best form of tax debt relief for you. It’s important to bear in mind the fact that the IRS does not openly promote tax debt relief. That’s why it’s good to seek out a reputable tax service to explore your tax debt relief options and determine which is best for you.
What qualifies you for tax debt relief?
Trying to catch up on your IRS payments can leave you in a financial crunch, and you can experience a great deal of stress, as well. Besides an unexpectedly high tax bill, a natural disaster may have recently swept through your area, making it challenging for you to successfully file your taxes and pay your tax bill. You may also be going through a financial hardship which can allow you to qualify for relief. There are many different situations that could qualify you for tax debt relief.
Tax debt relief programs
There are a number of tax debt relief programs offered by the IRS that can help make your tax debt more manageable. You must apply and be approved by the IRS for these programs, but here are some of your options:
Installment agreements: If you can’t pay your debt in full, but are able to make smaller payments overtime, an IRS installment agreement may work for you. This allows you to pay off your tax debt in smaller increments over a determined period of time. If this is approved, the IRS will stop any wage garnishment, seizure, or tax lien they’d placed, and may also reduce penalties you faced for failing to pay. You will, however, have nominal fees to pay if you enter an installment agreement.
Even if you enter an installment agreement, you must continue to make your payments or the IRS could revoke your agreement. You must make every one of your payments, file all current and future returns and income taxes, and provide accurate information throughout the process.
- Offer in compromise: This is when you’re able to negotiate a settlement that’s less than your outstanding balance. If approved, the IRS will forgive some of your debt in order to receive as much of the total bill as possible. However, to be approved, you must meet one of these conditions:
- Effective tax administration – you do not contest your collectability or liability, but can demonstrate that paying debt would create a significant financial hardship or distress.
- Doubt as to collectibility – you will never feasibly pay off your tax bill in full, though the IRS will ensure your assets and current and projected future income will not allow for them to enforce traditional collection means.
- Doubt as to liability – requires you to prove there is doubt the tax liability is correct, typically due to examiner mistakes, omitted information, or new information that would change how much you owe.
Currently not collectible: In this case, your tax debt is put on hold for a certain period of time. While in this status, the IRS will stop all other collection activities, but your debt may still accrue interest and other penalties for failing to pay. The IRS can also still file a Notice of Federal Tax Lien, which can significantly affect your credit score in a negative way. The IRS has 10 years to collect from you.
To qualify for this, you must file any delinquent tax returns and provide details around your income status, current expenses, and other debts you have.
- Innocent spouse relief: If you and your spouse file a joint income tax return, you are both responsible for the tax, interest, and penalties that result from the return. Even if it’s your spouse that reports income or claim credits or deductions incorrectly, you’re still liable. However, with this program, you may be able to prove you’re an innocent spouse and be exempt from taxes caused by the other person.
In most cases, the IRS tax debt relief will not forgive your debt completely. Due to the extensive qualifications, total debt forgiveness is very rare. You must be able to prove that you don’t have the means to repay your debt, have few assets the IRS would be able to levy, and don’t make an income above the minimum need for essential living expenses. Because these regulations are so strict, your better option would be to work with a professional on one of the programs listed above.
How to get tax debt relief
It’s possible to set up an IRS debt forgiveness program on your own, but the extensive detail you must provide and qualifications you must meet could make it difficult to get approved for a program, or a tax balance removed or reduced. It’s important to work closely with the IRS to understand your options and ensure you meet all requirements.
Or, you may choose to work with a tax professional who can help get IRS debt forgiveness approved. They will help analyze your finances and develop a case for the IRS based on your individual situation, providing all of the correct information and meeting requirements for the program.
Typically, whether applying yourself or working with a tax professional, there are a few steps in the tax debt relief process if you owe taxes to the IRS:
- Identify the issue (how much do you owe, does the IRS currently have any holds on your assets, etc.)
- Investigate the cause (did you provide incorrect information on your return, do you not have a high enough income, do you not have assets that can be used as collateral, etc.)
- Find a solution (which debt relief program would work best for your situation)
- Build a case (outlining why you can’t pay the tax debt and the proposed solution)
- Submit the case to the IRS
- Receive tax relief (if approved, your relief depends on the program you applied for)
The best form of tax debt relief will depend on your personal situation, and it’s important to work with a reputable tax service or the IRS directly to understand your options and decide what’s best for you.
How to pay off tax debt
If you don’t get approved for one of the above programs, or you prefer to take a different route to pay off your tax debt, you do have other options including:
- Take out a bank loan or personal line of credit to cover what you owe. Try to get a lower interest rate than that charged by the IRS so that you owe less in the long run.
- Take out a loan against a qualified pension plan, such as 401(k) or IRA. While you’ll lose some potential investment returns, and there will likely be some interest owed, it will likely be less than the penalties you’ll owe from tax debt.
- Consolidate your taxes with a personal loan or home equity loan or line of credit.
- Stay on top of your budget. Cut all unnecessary spending, and track what you’re spending everywhere else. Try to lower your bills or eliminate payments you don’t need, such as subscription plans or gym memberships.
- Generate additional income, either by picking up a second job, starting a side hustle, or selling some of your gently used items that you no longer need.
Again, the most important part of repaying debt is starting to do so right away. As time passes, penalties and fees, as well as interest, will add to the total amount you owe and can make paying off the debt even more difficult.
Tax debt relief in a national disaster
If a natural disaster, like a hurricane or flooding, is a federally classified catastrophe and affects you and your city, the IRS may file an automatic tax extension so you can pay taxes you owe later in the year.
To be eligible, you must reside in or your business must operate out of a federally declared disaster region and there must be natural devastation. Additionally, if you have property loss that’s not covered by homeowners insurance, it may be tax-deductible.
Benefits of tax debt relief
The primary benefit of tax debt relief is your debt may be lowered or even eliminated (in rare cases). The IRS will work with you to repay your debt or lower your total amount so that you avoid financial ruin and other penalties.
For example, when you’re unable to pay your tax bill in full, the IRS can garnish your wages, meaning your earnings can be withheld by your employer for the payment of debt. However, with tax debt relief, you can stop wage garnishment and keep those funds for your other financial needs.
Another thing the IRS may do is implement a bank levy, which allows them to take funds directly from your bank account. This freezes your account until the funds are removed and sent to the IRS, and they use those funds to pay down your debt. Tax debt relief helps prevent this action, so you don’t have to worry about your debit card being declined or your savings account drained.
The IRS can also put a lien on your property, which can result in seized proceeds when you sell. Or, they could place a tax levy, which means they can take the property and sell it to recoup the taxes you owe. Tax debt relief helps ensure none of this happens.
Does tax relief hurt your credit?
Tax relief doesn’t hurt your credit score, but the IRS will report overdue tax debt to the credit bureaus. So, if you owe taxes to the IRS, this will hurt your credit score. Failing to make payments can also hurt your credit score, as could taking out a loan or using a credit card to pay your tax bill because it increases your credit utilization. Once your tax debt is paid off, your score will likely rebound.
Are tax debt relief companies legitimate?
Some tax debt relief companies are legitimate, but others are not. They may charge massive non-refundable fees, and still not get your debt relieved. They may even take your money and never send the proper paperwork or application to the IRS. Be sure to look out for the signs of tax debt relief scams.
Call our tax experts today for a free consultation. Speak to a tax expert about Tax Debt Relief.
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