It’s almost the end of the year and the taxman is beginning to collect. For a taxpayer, there’s nothing more depressing than receiving collection notices from Uncle Sam. It’s even more depressing when you know you can’t afford what they are asking. So, what should you do?
In such a situation, you don’t have to panic. The Internal Revenue Service (IRS) has a tax relief program that features different ways you can pay your debt more comfortably or reduce it. Even though tax relief may not permanently do away with your tax liability, it can make the repayment more manageable.
What’s Tax Relief and who’s Eligible?
A tax relief refers to an arrangement that’s meant to reduce your tax liability. It’s simply a negotiation for payment or settlement arrangement with the taxman. As mentioned earlier, tax relief may not erase your tax liability but allows you to have an easy payment process. But still, there’s the possibility of your tax relief option becoming costly in the long run.
Tax relief normally applies to individuals with financial difficulties and vulnerable members of society such as:
- Victims of natural catastrophes such as hurricanes, floods, and wildfires
- Senior citizens
- Divorced or separated persons
- Bereaved individuals
Tax Relief Options
The IRS allows you to negotiate payment of your tax bill using any of these relief options:
Here, the IRS allows you to pay off your tax debt in smaller payments over a certain period. It can be short-term (less than 120 days) or long-term (more than 120 days). To qualify for a long-term installment plan, your tax bill needs not to exceed $50,000. If it does, then you should consider a short-term arrangement. You should be aware, however, that this tax relief option is accompanied with interests and penalties. So, you’ll end up paying much more than what you owe the IRS.
Offer in Compromise (OIC)
If you are struggling a lot to clear your tax bill, the IRS can allow you to pay it for less. In this case, you’ll need to propose a reasonable offer in compromise. Since the IRS doesn’t trust people easily, they have to review your offer to ensure it reflects your current financial situation. They are likely to consider the following:
- Current assets
- Current income
To check if you are eligible for an OIC, you should visit the IRS OIC page. This should be done before you prepare your proposal.
A tax deduction is meant to lower your taxable income and in the end, reduce your tax liability. For example, a taxpayer with a tax liability of $75,000 who enjoys deductions amounting to $10,000 is only expected to pay $65,000.
Just like a tax deduction, a tax credit is designed to lower your tax liability by providing you with some form of savings. Rather than lowering your taxable income, a credit directly discounts your outstanding tax debt. For example, if you owe the government $4,000 as tax debt and you qualify for $1,000 credit, you’ll only be expected to pay $3,000.
Popular tax credits include:
- Seniors tax credits
- Separation/divorce credits
- Employment tax credits
- Housing tax credits
- Home care tax credits
The IRS can be lenient sometimes and one way to do it is forgiving penalties and interests placed on tax bills. For example, if you haven’t accumulated any tax penalty in the last 3 financial years, the IRS can forgive your past penalties. We call this tax relief option penalty abatement.
Likewise, the IRS can forgive interest accrued over time if you have been tax compliant lately. The forgiveness is called interest abatement. In both cases, you may have to do a face-to-face interview with the IRS to discuss the terms.
The taxman allows you to exclude certain incomes from taxation. In the end, this helps to reduce your tax bill. Normally, excluded income is not reflected in your tax return and thus it’s not accounted for. While certain incomes are excluded from taxation because they are hard to determine, others are excluded as a way to encourage you to consider certain takes. For example, employees are offered tax exclusions on health insurance to encourage them to take the coverage. Expatriates also have tax exclusions of up to $104,100 for income earned in foreign countries.
If after trying all the above options still can’t reach a compromise with the IRS, look for a personal loan and use it clear your tax debt. That’s assuming that your credit score is not damaged. It’s important, however, to consider the terms of the loan before accepting it. In particular, ensure you are comfortable with the repayment period and the interests applicable.
Seeking Help from a Tax Relief Company
Negotiating for tax relief is never an easy thing. It takes a lot of time and can be stressful if you have never done it before. That’s why seeking help from a tax relief company is a good idea. They can negotiate with Uncle Sam on your behalf in exchange for a small fee. However, there are no guarantees that the negotiations will be a success.
But still, it’s better to use a tax relief company than going all alone. After all, they have tax attorneys and certified accountants on their payroll who are experienced in tax relief matters. These experts can look for deductions and credits that are owed to help reduce your tax burden. They can also help you prepare an irresistible OIC and ask for abatement. More importantly, these experts can help you keep your property.
But considering that there are many tax relief companies, it’s important to approach them carefully. Here are a few tips you can use:
- Check for the upfront fee to ensure it’s reasonable and affordable
- Meet with the representative of the company at the time of hiring
- Request an explanation for your tax relief options and what to expect once the negotiations start
- Read their policies to see if they are favorable
- Understand the implications of canceling your agreement with the company
- Review their recent accomplishments to determine your success rate
- Verify their registration
With so many tax relief options available, you don’t have to panic just because you have a tax bill. Talk to a tax relief attorney to find which of the options is ideal for your situation. It should be insisted, however, that we all have the obligation of paying taxes and that’s how we can avoid owing Uncle Sam.