What Is Tax Debt Relief?
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At a Glance
If you have unpaid taxes, handling it can be stressful and time-consuming, especially if you receive an IRS notice of deficiency, which is a legal notice informing you that your prior tax payment was lacking the necessary funds and you’ll likely owe additional taxes.
However, paying off tax debt doesn’t have to be impossible. Tax debt relief services exist to help you settle your tax debt for less, where you work with tax professionals to find the best tax debt relief program for you, and help reach the best settlement you can. Or, you can work with the IRS yourself.
If you need help with IRS debt, read on to learn more about:
Understanding tax debt relief
If you can’t pay your taxes on time, you may qualify for a form of tax debt relief.
Tax debt relief is designed by the International 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.
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.
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:
1. 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.
2. 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.
Learn more: Offer in Compromise
3. 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.
Learn more: Temporarily Delay the Collection Process
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.
4. 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.
Learn more: Innocent Spouse Relief
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 avoid tax debt relief scams?
Unfortunately, some tax debt relief companies who claim they will help you with the IRS are actually scams. They may charge you massive fees, take your money and never file the paperwork, or even make unauthorized charges.
Even though you can work with the IRS yourself to apply for a tax debt relief program, it may be easier to work with a company who will advocate for you. If you do this, there are a few signs of scams to look out for:
- A promise to wipe out your debt completely, or reduce interest or penalties
- Directly soliciting your business by mail or email
- Don’t review your financial situation
- Use tactics that delay your case
- Claim you no longer qualify, or the IRS rejected your case
- Demand payment before doing anything
- Guaranteeing debt forgiveness
Your first step should be to contact the IRS directly to learn what you owe and what your options are. If you choose to get help from a professional, be sure to do complete and thorough research to avoid scams.
According to the Federal Trade Commission, only certain tax professionals have the authority to represent you wit the IRS, including:
- Enrolled agents (federally authorized tax practitioners who can represent taxpayers before the IRS)
- Certified Public Accountants (CPAs)
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 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.
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.
Yes, you should always file your tax return regardless of whether you’re able to pay your tax debt. This helps you avoid additional penalties and interest, especially because the failure to file penalty is typically 10x more than the failure-to-pay penalty, up to 25% of your total unpaid tax debt.