Are you facing a heavy load of tax debt? You are not in this situation alone, there are millions of Americans battling with their taxes. There might be a way to alleviate some of that financial stress. Discover comprehensive insights into the IRS tax debt relief program right here.
Annually, within the United States, more than $450 billion in unpaid tax debt accumulates. A substantial portion of this tax shortfall, approximately $380 billion, can be attributed to underreporting.
However, the IRS maintains records of W2s, 1099s, and all income-related documents for each taxpayer in the United States. Consequently, if you engage in underreporting or fail to file, it’s only a matter of time before the consequences catch up with you.
Were you aware that the tax code comprises more than 10 million words? Given the extensive nature of IRS tax regulations and the revenue code, it’s imperative to maintain a proactive approach to your tax obligations.
However, life’s unpredictable, and several Americans find themselves in a situation where they owe taxes and are seeking tax relief solutions. Fortunately, there are several tax debt relief options available for people owing taxes.
If you are bothered about your outstanding debts, this guide will assist you during this challenging period and support you in eliminating that tax burden.
What is Tax Debt?
If you happen to neglect paying or filing your taxes, make an error on your tax return, or if the IRS decides to make adjustments to your taxes resulting in you owing money, you find yourself facing tax debt.
What Is Tax Debt Relief?
Tax relief is any government initiative or policy crafted to assist individuals and businesses in reducing their tax liabilities or addressing their tax-related debts.
Furthermore, tax relief can come as general tax reductions, specialized programs benefiting particular taxpayer groups, or efforts that support specific government objectives. For instance, the child tax credit reduces taxes for parents with young kids, and tax incentives for eco-friendly upgrades (like energy-efficient windows) help advance U.S. energy independence and cleaner air goals.
Tax relief doesn’t always mean getting rid of your financial responsibility to the IRS. Instead, it means finding a way to create a payment plan that suits you or reducing a portion of that debt.
Special tax relief is also available in certain situations, such as natural disasters, where eligible victims may receive benefits like extended deadlines or reduced amounts owed.
Basics of IRS Tax Debt Relief Program
Tax relief programs are designed by the IRS to assist taxpayers in reducing the amount they owe in taxes through tax credits, deductions, and exclusions. Different programs are available to aid taxpayers who have fallen behind on their taxes in resolving their tax-related debts, which could potentially prevent the imposition of liens.
1. Tax Deductions
A tax deduction decreases your taxable income for the year, which in turn reduces the amount you need to pay in taxes. Taxpayers have the option to either use the standard deduction or list their deductions on Schedule A of Form 1040 or 1040-SR. You can’t use both methods at the same time.
For instance, we will give you a scenario of home office tax deduction:
Sarah is a freelance graphic designer who works from her home office. Sarah uses a dedicated room in her house as her workspace, which qualifies her for a home office tax deduction.
During the tax year, Sarah incurs various expenses related to her home office, such as:
- Rent or Mortgage Interest: Sarah pays $1,200 per month in rent, and her home office accounts for 10% of her apartment’s total square footage.
- Utilities: She spends $100 per month on electricity and internet for her home office.
- Office Supplies: Sarah purchases office supplies like a computer, desk, and printer, totaling $2,000.
To calculate her home office tax deduction, Sarah determines the percentage of her home used exclusively for business. In this case, it’s 10%. She also keeps meticulous records of her expenses.
Her deduction calculation looks like this:
- Rent or Mortgage Interest: $1,200 per month x 12 months x 10% = $1,440
- Utilities: $100 per month x 12 months = $1,200
- Office Supplies: $2,000
Total Home Office Deduction = $1,440 (Rent) + $1,200 (Utilities) + $2,000 (Office Supplies) = $4,640
Sarah can deduct $4,640 from her taxable income, reducing the amount of income subject to taxation. This deduction helps lower her overall tax liability, allowing her to keep more of her hard-earned money.
However, she must ensure that her home office meets the IRS criteria for eligibility, including being used regularly and exclusively for business purposes. Additionally, Sarah should keep all necessary documentation and receipts to support her deduction claim in case of an IRS audit.
2. Tax Credits
Here’s an example. We will give you a scenario using education tax credits:
Mark is a college student pursuing a degree in accounting. He is eligible for education tax credits, which can significantly reduce his tax liability.
During the tax year, Mark incurs the following qualified education expenses:
- Tuition and Fees: Mark pays $6,000 in tuition and $500 in fees for his college courses.
- Textbooks and Supplies: He spends an additional $800 on textbooks and necessary supplies for his classes.
Mark is eligible for two types of education tax credits: the American Opportunity Credit and the Lifetime Learning Credit. Here’s how he calculates his potential tax credits:
- American Opportunity Credit: Mark is eligible for this credit because he is in his first four years of higher education. The credit covers 100% of the first $2,000 in qualified expenses and 25% of the next $2,000. So, for Mark:
$2,000 (100% of the first $2,000) + $500 (25% of the next $2,000) = $2,500
Mark can claim a maximum American Opportunity Credit of $2,500.
- Lifetime Learning Credit: This credit covers 20% of the first $10,000 in qualified expenses. For Mark:
$10,000 (20% of the first $10,000) = $2,000
Mark can claim a maximum Lifetime Learning Credit of $2,000.
Now, Mark can choose to claim either the American Opportunity Credit or the Lifetime Learning Credit, but not both for the same tax year. In this scenario, he decides to claim the American Opportunity Credit, which is more favorable.
By claiming the $2,500 American Opportunity Credit, Mark directly reduces the amount of taxes he owes. This credit makes it easier for him to pay for his education and reduces his taxes. Hence, going to college is more affordable for him.
3. Tax Exclusions
Tax deductions involve subtracting amounts from your income, while tax exclusions categorize specific types of income as not taxable. Tax exclusions, therefore, lower your taxable income and the amount of taxes you owe.
As an example, you typically don’t have to count child support payments, income from municipal bonds, and life insurance death benefits as part of your taxable income.
One familiar tax exclusion is for health insurance provided by your employer. The money your employer spends on your health insurance doesn’t count for federal income and payroll taxes, and the part of the premiums you pay usually isn’t included in your taxable income either.
Excluding premiums helps you pay less in taxes, which means your health insurance costs you less in the end.
IRS Tax Debt Relief Program: What Are Ways To Get Tax Relief?
The IRS Fresh Start program helps people who owe taxes catch up and avoid things like tax liens, money taken from their paychecks, and going to jail.
Introduced in 2011, this program includes various alterations to the U.S. tax laws. These changes aim to simplify how taxes are collected and provide the opportunity to resolve your tax debt for an amount less than what you originally owed. Both individuals and businesses can take advantage of this program.
Below are four Fresh Start programs available to taxpayers who are overdue in their tax payments:
1. Offer In Compromise (OIC)
If you’re facing financial hardship and it seems impossible to pay your entire tax bill, the IRS could potentially permit you to settle your debt for a reduced amount.
This choice is called an “offer in compromise.” If paying the full tax amount is causing financial difficulty or is impossible for you, you have the option to propose an Offer In Compromise.
When the IRS examines your request for an offer in compromise and decides whether to approve it, they will take into account various factors like your assets, income, expenditures, and your capacity to pay.
They will want to see documents about your finances to decide if you are qualified or not.
2. IRS Repayment Plan
The IRS often lets taxpayers divide their total amount into smaller payments.
A long-term payment plan will spread your payments over 120 days or longer. To be eligible, your total debt (including taxes, interest, and penalties) should be $50,000 or less.
A short-term payment arrangement will structure your payments to be completed within 120 days or less. To be eligible, your total debt can be as high as $100,000.
3. Currently Not Collectible (CNC)
In the CNC program, the IRS decides that your monthly income is so low that you can’t pay your tax without facing financial hardship. The IRS stops trying to collect your debt, and they won’t take money from your bank accounts, your wages, or your things. Instead, you wait until you can afford to pay before you start making payments.
4. Penalty Abatement
The IRS might lower or erase penalties from what you owe. However, you need to show a valid reason why you didn’t pay your taxes on time first.
A valid reason, or “reasonable cause,” can include events like natural disasters, fires, and other disruptions; the death, severe illness, or incapacity of the taxpayer or someone in their close family; or difficulty in getting important tax-related records.
It’s important to understand that the IRS makes it clear that simply not having enough money is not considered a valid reason for not filing or paying your taxes on time.
Choosing Tax Relief is a Wise Decision
While owing money to the IRS can be quite intimidating, the situation will only become more challenging if you avoid dealing with your debt and creating a plan for the future.
If you follow the rules and pay attention to any letters you get, you increase your chances of getting help. And if you can’t pay everything you owe all at once, don’t worry. There are different ways to set up payment plans.
Although you might hesitate to spend money on a tax expert to assist with your tax relief, it’s probable that you’ll end up saving money in the future by doing so.
Conclusion: IRS Tax Debt Relief Program
Tax relief means that the government has ways to make it easier for people to pay their taxes. They do this by giving tax deductions, tax credits, or excluding some income from being taxed (exclusions).
When you’re doing your taxes, be sure to use these options to avoid paying more taxes than necessary. If you’re unsure, it’s a good idea to get advice from a tax expert or an IRS tax attorney who offers tax relief services.
Frequently Asked Questions (FAQs) and Answers on the IRS Tax Debt Relief Program
Here are some frequently asked questions (FAQs) about the IRS Tax Debt Relief Program, along with their answers:
- What is the IRS Tax Debt Relief Program?
The IRS Tax Debt Relief Program refers to various programs and options provided by the Internal Revenue Service (IRS) to help taxpayers who are struggling to pay their taxes. These programs aim to alleviate the burden of tax debt and offer ways to settle or reduce the amount owed.
- Who is eligible for IRS Tax Debt Relief?
Eligibility for IRS Tax Debt Relief depends on your specific financial situation. Generally, individuals, businesses, and self-employed individuals facing financial hardship or difficulty in paying their taxes may be eligible.
- What are some common IRS Tax Debt Relief options?
Common IRS Tax Debt Relief options include:
- Installment Agreements: Setting up a monthly payment plan.
- Offer in Compromise: Settling for less than the total owed.
- Temporary Delay: Temporarily postponing collection actions.
- Currently Not Collectible (CNC): Proving that you can’t afford to pay currently.
- Innocent Spouse Relief: Relief for spouses not responsible for the debt.
- How do I apply for IRS Tax Debt Relief?
You can apply by contacting the IRS directly, either online or by mail. It’s a good idea to talk to a tax expert or a lawyer for help with figuring out what to do.
- Will the IRS Tax Debt Relief affect my credit score?
IRS Tax Debt Relief may have an impact on your credit score, especially if you enter into certain agreements. However, it’s typically better for your credit than ignoring tax debt and facing IRS collection actions.
- Can the IRS Tax Debt Relief completely eliminate my tax debt?
In some cases, IRS Tax Debt Relief can lead to a significant reduction or even complete elimination of tax debt through an Offer in Compromise. However, this outcome depends on your individual circumstances.
- What happens if I don’t seek IRS Tax Debt Relief?
If you don’t seek relief and fail to pay your taxes, the IRS can take actions such as garnishing wages, seizing assets, or filing a tax lien, which can seriously impact your financial stability.
- Is there a deadline for applying for IRS Tax Debt Relief?
There is no specific deadline for applying, but it’s advisable to address your tax debt as soon as possible to prevent additional penalties and interest from accruing.
- Are there any fees associated with IRS Tax Debt Relief?
Some IRS relief programs may have applications or setup fees. Please review the terms and costs associated with the program you choose.
- Can I negotiate IRS Tax Debt Relief on my own, or should I hire a professional?
While you can negotiate on your own, many people find it beneficial to seek assistance from a tax professional or attorney who is experienced in dealing with the IRS and tax debt matters.