Receiving a tax bill in the mail is never fun. It becomes bigger stress when that bill is so high that you have no idea how will you be able to pay it. Rather than stressing about losing your home or facing other collective action, you can apply for one of the IRS tax relief programs, including:
- Installment Agreement
- Offer in Compromise
- Penalty Abatement
- Innocent Spouse Relief
- Currently Not Collectible Status
- Filing outstanding tax returns
The IRS offers these tax relief programs and a few others, but not everyone qualifies for all of them. Thus, the right one for you depends on your situation. Asking the following questions can help you to determine which one might work for you.
Have You Filed Your Tax Return?
When you receive your tax bill, the first question you should ask yourself is whether you filed a tax return for the year in question. When you do not submit a tax return but were supposed to do so, the IRS eventually submits one for you, which is known as a Substitute for Return. They do this using the income information they have on file, but they do not include any deductions, credits, or exemptions for which you might qualify. Additionally, they might not have the correct information, since they are just using income information from your employer or another income provider.
Therefore, if the answer to this question is no, then the best step to take to solve your federal tax debt is to file one. Many people find their tax liability greatly reduced once they file a return, which also reduces the amount you owe in penalties and interest. You might even find you have a refund rather than a bill.
How Much Do You Owe?
When determining which tax relief program works best for your situation, it is beneficial to consider how much you actually owe. Some of the tax relief programs make more sense for large tax bills, such as those over $10,000. For example, the IRS might not choose to negotiate an Offer in Compromise if you owe $5,000. Even though this might seem like an amount you will never be able to pay, the IRS might believe that it is possible to get that money from you at some point before the statute of limitations end. This might mean they will be less willing to negotiate for a lower amount.
No matter how much you owe, you can find a solution to help you pay; you just might find that you do not qualify for some of the tax relief programs depending on the amount of your bill.
What Is Your Income?
Just as the amount you owe plays a big role in the type of programs for which you qualify, so does your income. When the IRS reviews applications for tax relief programs, they look closely at your income to determine whether the deal is reasonable.
This is not just for an Offer in Compromise; they might also review your income level when determining whether the monthly amount you suggest for an Installment Agreement makes sense with your income. For example, if you owe $20,000 and plan to set up an Installment Agreement to pay $200 a month, but you make $6,000 a month, the IRS might expect to get more money per month from you and reject your application. Thus, it is important to consider your income level when deciding which tax relief program for which to apply.
What Other Debt Do You Have?
Many of the IRS programs look at your overall financial situation, which includes other debt you might have. The IRS will want to see your necessary monthly expenses when they determine how much money you can reasonably pay to them, whether as an Installment Agreement or Offer in Compromise. If you have a mortgage, car payment, credit card bills, and other lines of credit, then this might impact your ability to negotiate a settlement. In fact, this might help you to negotiate a settlement, since you have other obligations for your income.
How Many Assets Do You Have?
The number of assets you have might also impact your qualifications for tax relief. If you have several assets, especially those beyond your homestead and automobile necessary for transport to work, then you might find that the best solution is to sell your property and pay your debt rather than apply for a tax relief program. Thus, your assets might disqualify you for some of the tax relief programs, such as an Offer in Compromise, since the IRS might believe you can pay your full debt through selling the property.
Can You Sell Any of Your Assets to Pay Your Debt?
As stated above, the IRS will want to see whether there is something that you could sell to pay off your debt before accepting a tax debt negotiation. However, they do take into account your ability to live. Therefore, if your assets include a house and a car of average value, they might not expect you to sell those to pay for your debt and focus on your income and expenses to determine your ability to pay the debt.
However, if you have a high-value home, car, artwork, or other assets, then they might reject your tax relief applications and instead expect you to sell something to pay for the debt. You might be able to appeal the result, but it is important to recognize this before you negotiate, especially for an Offer in Compromise, a program requiring you to prove that there is no way the IRS can ever expect to get the full amount of the outstanding debt.
Do You Have a History of Tax Problems?
Most of the tax relief programs require you to be compliant with all past and future tax returns and payments. Therefore, if you have a long history of being late with paying or filing, then you might not get your application approved.
However, if you have never been late with a tax return or payment, then you might be able to lower your tax debt through a Penalty Abatement. The IRS has a program set up for first-time offenders to more easily negotiate a Penalty Abatement. For many, this can reduce the tax debt to an amount easily paid off through an Installment Agreement or some other form of payment.
How Much of a Burden Would It Be to Pay the Debt?
Many of the tax relief programs, especially the Offer in Compromise, require the tax debt to be a significant burden on you. Therefore, before you start comparing the different tax relief programs and determining which one to do, it is beneficial to consider whether you could pay off the debt and what type of financial situation it would put you into. If it would greatly impact you negatively, then you might be a better candidate for one of the programs than if it would just be a minor inconvenience.
Is the Debt Really Your Spouse’s?
One tax relief program the IRS offers is the Innocent Spouse Relief. This has strict criteria, one of which is that the debt is completely the fault of your current or ex-spouse, and there is no reasonable way that you would have known about it. This clears you from being held accountable for part or all of the debt.
Do You Just Need a Break to Get On Your Feet?
Some people just need to take a break to get their finances back on track before they can handle the debt. Rather than not paying and facing collective action, you can apply for Currently Not Collectible status with the IRS. You will still accrue interest and penalty fees and must pay the debt once you are no longer in this status, but you will not have to worry about collective action during this time. This is best for those who have just lost their job but expect to get employment again soon or otherwise face a temporary financial problem.
By asking yourself these ten questions, you can get a better idea of your own situation and which tax relief program works best for you. Need more help? Call Fidelity Tax Relief today at 877-372-2520 and speak with one of our tax professionals about your situation. We will help you to find the right solution and then work on your behalf to finalize it with the IRS.