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What Is Tax Relief? Your Ultimate Guide To Tax Relief 2022

There are a lot of ways that you might find yourself falling behind on your taxes. As if owing to the IRS more money wasn’t bad enough, the amount that you owe can quickly compound due to the penalties, fees, and interest that will be charged.  

Unless you have a large sum of money that’s easily accessible, it might be pretty difficult to pay off your balance. That’s where the concept of a tax relief guide comes in and potentially helps you to get on the path to a fresh start

What Does Tax Relief Mean?

Tax relief refers to a program or policy created by the IRS to help a taxpayer reduce their overall tax obligations. The amount is rarely entirely forgiven, so tax relief is designed to make it easier to repay the obligation. These programs are designed to help establish payment plans to repay the deficiency or negotiate potential settlements.  

There are several different types of tax relief programs available for personal income tax relief, property tax relief, real estate tax relief, business tax issues, and more. Tax credits are another type of tax relief. Some tax credit programs include the American Opportunity tax credit and the earned income tax credit. For business owners who want relief from business taxes, there’s the Coronavirus Tax Relief for Businesses and the Tax-Exempt Entities program. It can be difficult to know which ones you (and your spouse, if you’re married) are eligible to use. It might be a good idea to talk with a qualified tax consultant about your options if you need tax relief. 

What Are Some Of The Options For Tax Relief?

There are a few different programs available that have been specifically designed to help taxpayers repay their balances. Each of these programs will have strict qualifications and eligibility requirements that are non-negotiable, including income limits on total household income. However, the IRS is likely to accept your proposal as long as the specific criteria are met.  

Here is a list of the most commonly used tax relief programs and how they work.

Installment Agreements

An installment agreement is essentially a payment plan that will allow you to break up your taxes into smaller accounts and stretch them out over some time. These agreements can be very beneficial if you have a large amount to repay and don’t have the funds to pay it off in one lump sum. There are four types of installment agreements: guaranteed, streamlined, partial payment, and non-streamlined. 

In general, they are designed to be paid off in a few months with staggered due dates, but there have been cases where the agreement lasted for up to 72 months. However, it’s important to note that the taxes will still accrue interest fees and penalties while you are repaying it. So the sooner that you pay off your tax deficiency, the less money it will cost you in the long run. Typically, you can make monthly payments.

To qualify for an installment agreement, these are the criteria that must be met:

  • For a short-term payment plan of 120 days or less, you must owe less than $100,000 in combined taxes, interest fees, and penalties while having filed all previous tax returns.

    There are no application fees for setting up a short-term payment plan. It’s possible to have the deadline extended to 180 days from the date of the agreement by contacting the IRS and requesting additional time. 

  • For a long-term installment agreement of 120 days or more, you must owe less than $50,000 in combined taxes, interest fees, and penalties while having filed all previous tax returns.

    There will be application fees required to set up an installment agreement. For automatic withdrawals from your bank account, it will be a $31 fee to apply online or a $107 fee in person, by phone, or through the mail. Paying through a different method than automatic withdrawal will require a $149 fee online or a $225 fee to apply in person, by phone, or through the mail. 

Penalty Abatement

Part of the reason that taxes are so difficult to repay is the interest fees and penalties that are tacked on. They can quickly compound from a relatively small sum into a much more unmanageable amount. However, the IRS does offer penalty relief in the form of abatements (removals). The overall tax amount won’t be lowered, but the additional fees and penalties could get removed.  

Penalty abatements are often granted to taxpayers who accumulated tax arrears because they could not meet their financial obligations. Situations such as losing your home in a fire, experiencing a natural disaster, or a death in your immediate family can sometimes be enough for the penalties to be removed.  

In other cases, you would have to meet some of the following criteria to present your case and request a first-time offender penalty abatement:

  • Have paid off or arranged to pay any taxes currently due
  • Have filed all your required tax returns
  • Have had no penalties for at least three years previously to the current tax year being protested 

Currently Not Collectible Status

If you can prove that repaying your taxes would cause you to experience economic hardship, you might be eligible for “Currently Not Collectible” status.  

You would have to provide a lot of financial information to the IRS regarding your monthly income and living expenses. The IRS will then review this information and determine whether or not you can reasonably repay your arrears. In most cases, the IRS will suggest using another tax relief program to help you with your overdue balance, but it’s possible the IRS will place you in “Currently Not Collectible” status.  

If granted, this status will temporarily pause all collection attempts made on your account. The IRS will establish a time in the future where your case will be reviewed to determine whether or not your financial health has improved to the point where you can reasonably resume making payments. 

It’s important to note that the “Currently Not Collectible” status will not reduce your tax balance in any way. All it will do is freeze collection attempts until you are financially stable enough to resume paying your balance. 

Offer In Compromise

An offer in compromise is a way for taxpayers to potentially settle their tax arrears for a lower amount than they currently owe. These offers are very often rejected and should be considered as the final option for tax relief. 

An Offer in Compromise will require a substantial amount of proof that you will not be able to repay your taxes, or doing so would create serious economic hardship. Similar to “Currently Not Collectible” status, the IRS will review several key factors of your finances, such as your income, expenses, and assets. 

The eligibility requirements to make an offer in compromise are that you must be up to date with all tax returns and you can not be involved with an open bankruptcy proceeding. If you meet these requirements, you could then send in your offer for review by the IRS.  

Along with your offered settlement number, you would also need to send in:

  • A non-refundable $205 application fee
  • A non-refundable monthly installment payment (if you are filing Periodic Payment offer and you will be paying in six or more installments)
  • A non-refundable payment of 20% down payment of your total offer (if you are paying you offer amount in five or fewer installments)  

If the offer is rejected, the payment you made would be applied to your overall back tax balance. You have the option to file an appeal within 30 days from the date of rejection and attempt to renegotiate your settlement offer with IRS appeals.  

If your offer is accepted by the IRS then the IRS will only release federal tax liens after you pay off the accepted offer amount in full.  

What Happens If You Don’t Pay Your Taxes?

The IRS has plenty of weapons at their disposal that can make your life miserable if you fail to repay your tax arrears. For starters, the aforementioned interest fees and penalties can quickly add up and make the balance owed much more difficult to repay. 

However, those are far from the only methods employed by the IRS to encourage tax repayment. To collect the taxes, the IRS may: 

  • Apply a lien against your assets: A lien is a legal claim of ownership made by the IRS, which means that selling the asset would require paying the sales proceeds to the IRS to be applied to your tax balance. The IRS won’t seize the asset necessarily, but you will not be able to sell it without paying the sales proceeds to the IRS in the process.
  • Garnish your wages: The IRS can obtain a court order that will be forwarded to your place of employment. Your job will then withhold a certain percentage of your earnings and send them to the IRS. The money will be applied to your tax balance until the balance is lifted or entry into a tax relief program is granted. The IRS could also withhold COVID-19 economic impact payments.
  • Seize your assets: It’s fairly rare for the IRS to go to this extreme, but in some cases, the IRS can legally seize your assets that the IRS had previously placed a lien on. They will then liquidate these assets by selling them and keeping the money to apply to your taxes.
  • Take you to criminal court: The rarest option by far on this list is for the IRS to file criminal charges against you. If the IRS has proof that you have knowingly and willingly refused to pay your taxes or lied on documents to pay less, the IRS may charge you with tax evasion. The sentence will vary depending on the circumstances, but the maximum sentence is five years in federal prison. 

The Takeaway

Every year, millions of Americans fall into some degree of tax arrears with the IRS. It’s so common that the IRS has created tax relief programs designed to help taxpayers pay their back payments instead of collecting the tax through other means. 

If you are having trouble paying taxes, consider your options for tax relief. Consulting with a tax expert at Coast One Tax Group can help you learn what your options are for additional relief and help you get out of tax trouble faster, easier, and cheaper.  

These professionals have decades of combined experience helping people enter into tax relief programs and get a fresh start financially. 

Sources: 

Why Do So Many People Fall Behind on Their Taxes? | Investopedia

Tax Relief Definition | Investopedia

Payment Plans Installment Agreements | Internal Revenue Service

Here’s What Taxpayers Should Know About Penalty Relief? | Internal Revenue Service

Currently Not Collectible | Taxpayer Advocate Service

Offer in Compromise | Internal Revenue Service

Understanding a Federal Tax Lien | Internal Revenue Service

Garnishment | Department Of Labor.

What Happens After My Property is Seized and How Do I Get It Back? | Internal Revenue Service

Tax Evasion Definition | Investopedia