What Is Tax Relief? How to Lower Your Tax Bill and Get Relief From Tax Debts
Tax relief is an umbrella term that refers to tax credits, deductions, and tax debt relief programs. The phrase refers to strategies that reduce your tax liability when your file your returns. It also includes programs that help taxpayers get relief from tax debts. Keep reading to learn more.
This guide defines tax relief. Then, it briefly looks at the types of relief you can claim when you file a tax return and provides extensive explanations of tax debt relief.
What Is Tax Relief?
Tax relief refers to anything that lowers your tax liability or helps you get out of tax debt. This includes deductions, credits, and exemptions that you claim on your tax return. It also includes programs that help you pay off or reduce the tax debt that you owe.
The government also offers tax relief in specific situations. For instance, people in federally declared disaster zones often get filing and payment extensions, a form of tax relief.
Tax Reduction Strategies
When you file a tax return, you can take advantage of the following types of tax relief:
- Tax deductions — Deductions reduce your taxable income and thus reduce how much tax you owe.
- Tax credits — Tax credits directly reduce your tax liability; if they are refundable, they can put money in your pocket by creating a tax refund.
- Tax exemptions — An exemption means that you don't have to pay tax on certain income. For instance, the IRS gives qualifying taxpayers a capital gains exemption of up to $500,000 when they sell their primary residence.
The IRS and state revenue agencies also issue specific types of tax relief. For instance, during the Covid pandemic, the IRS extended due dates for income tax returns. The agency also offered special tax credits to businesses that continued to pay their employees while they were closed or suffering a drop in revenue. The economic stimulus payments issued during COVID were also a type of tax relief.
Tax Relief for Tax Debts
The IRS offers several tax relief programs for people who owe back taxes. These programs are designed to help you pay off or reduce your tax liability. They all have different eligibility criteria and application processes. However, in almost all cases, you need to be current on your tax filing and payment obligations, and if you fall behind, you may be in default of the rules of your tax relief program.
An installment agreement is when you make monthly payments to the IRS until your tax debt is paid in full. The IRS offers the following options:
Guaranteed Installment Agreements
The IRS must automatically approve your installment agreement request if the following are true:
- You are an individual. Businesses don't have access to guaranteed installment agreements.
- You only owe income tax of $10,000 or less. Penalties and interest are not included in this amount.
- You can pay off the tax liability in three years or by the collection statute expiration date. The sooner date applies.
- You have filed all returns and paid all taxes due for the last five tax years.
Streamlined Installment Agreements for $25,000 or Less
If you owe $25,000 or less in tax, interest, and penalties, you may qualify to set up a streamlined agreement. You can apply for these payment plans online and you don't have to provide a financial statement. You simply must be able to pay off the tax bill in 72 months or before the collection statute expires if that's sooner.
However, you must be one of the following:
- An individual taxpayer.
- A corporation that owes income tax from Form 1120.
- A partnership that has a late filing penalty from Form 1065.
- A business that's no longer operating and owes any type of tax
If the total of your tax, interest, and penalties exceeds $25,000, you may want to make a payment to get under this threshold. Then you can apply for a streamlined agreement. You're not allowed to apply and then make a payment to get under the threshold. When reviewing your request, the IRS uses your balance on the day that you file the application.
Streamlined Installment Agreements for $25,001 to $50,000.
You can also apply for this installment agreement online, and if you meet the requirements, you don't have to provide a financial statement. To qualify, you must owe less than $50,0000 in tax, interest, and penalties, and you must be able to pay off the liability in 72 months or before the collection statute expires.
You can only apply for this option if you are an individual or an out-of-business sole proprietor. You also must set up a direct debit from your bank account for the monthly payment.
In-Business Trust Fund Express Installment Agreements
If you're still in business, you can set up Trust Fund Express Installment agreement if you owe $25,000 or less in payroll taxes or any other business taxes. You must be able to pay off the bill within 24 months or by the collection statute's expiration date if that's sooner.
You don't have to submit a financial statement, and the IRS won't send out an employee to assess your business assets. However, if you owe over $10,000, you must set up payments to come directly out of your bank account.
In-Business Trust Fund Installment Agreements
If you don't qualify for the express option, you can apply for an in-business trust fund installment agreement. This requires you to submit a detailed financial statement about the business and potentially your personal finances as well.
If your business owes $25,000 or less and you can pay off the bill in five years (or before the CSED), the IRS will not verify the info you provide on your collection information statement, but the agency may encourage you to sell assets to pay the bill. If you owe over $25,000, the IRS will closely verify every detail that you provide on your collection information statement. The IRS may require you to sell assets or reduce expenses to pay your tax liability.
If you don't meet the above criteria, you may still be able to set up a payment plan. However, you will need to complete a financial statement, and you will not be able to apply online.
Offer in Compromise
An offer in compromise is when the IRS accepts a lower amount than the total amount you owe in taxes. Tax debt relief companies use this program as a big marketing hook. They often air commercials advertising the chance to settle your tax debt for pennies on the dollar.
This is a real program. Every year, the IRS settles millions of dollars in delinquent taxes. However, it's not easy to qualify for. The IRS rejects the majority of offer in compromise applications.
If you cannot afford to pay your tax bill and you don't have any assets that you can liquidate, you may qualify for this program. However, you need to beware of companies that promise you that you'll get accepted before they know anything about your situation. That's a pretty big red flag that you should not hire that company for tax relief services.
There are three different types of offer in compromise programs.
- Offer in compromise based on doubt as to collectibility — This means you convince the IRS that it's doubtful that the agency will be able to collect any more than you're offering. For instance, if you show the IRS that if you sell your assets and devote all of your disposable income to the tax debt, you will only have $6,000, the agency will probably accept your $6,000 offer.
- Offer in compromise based on doubt as to liability — This applies when there is a legitimate doubt that you owe the tax liability. Generally, taxpayers only pursue this option if they no longer have the right to appeal the tax debt.
- Offer in compromise based on effective tax administration — If you can afford to pay your tax liability but doing so would create economic hardship, you may qualify for a settlement based on effective tax administration. For instance, imagine that you have equity in your home, but if you sold it, you wouldn't be able to afford a place to live and if you took a loan against it, you wouldn't be able to afford the repayments.
Partial Payment Installment Agreement
This is a monthly payment plan where you make payments until the collection statute expiration date. Then, the IRS waives the remaining balance on your account. To apply, you must share very detailed information about your finances, and you have to convince the IRS that you're making the largest payment you can possibly afford.
A PPIA is similar to an offer in compromise in that the IRS lets you pay off your tax debt for less than you owe. However, unlike an offer in compromise, you don't have to pay in a lump sum. Instead, you just make small monthly payments.
The drawback of this tax relief program is that it's not set in stone. The IRS will review your financial situation every two years. If your finances improve, the IRS may require you to pay the full balance or make larger monthly payments.
The IRS offers penalty abatement to first-time offenders and taxpayers with reasonable cause. Considering that late filing and failure-to-pay penalties can get up to 25% of your balance, penalty abatement is a very valuable tool for reducing the amount that you owe. You must request abatement. The IRS doesn't spontaneously remove penalties from your account except in very rare situations.
Generally, you cannot get relief from interest assessed on your account. However, if the interest is due to incorrect written advice from the IRS, you may be able to get it waived.
If you qualify for currently not collectible status, the IRS will stop all collection actions against you. To apply, you must provide the IRS will details about your finances. The IRS can resume collection actions when your situation improves.
What Is the Fresh Start Program?
The Fresh Start Program has become synonymous with tax relief. It is a series of changes that the IRS made to its tax debt collection processes in 2010. It was designed to help taxpayers get out of tax debt more easily. In particular, the changes made it easier for taxpayers to get offers in compromise and less red tape regarding various collections and filings related to unpaid taxes.
If you go to the IRS's website, you won't see a tax relief program called the Fresh Start program. Again, this was a series of updates that the IRS made over 10 years ago. However, when you look at tax relief websites, you will see a lot of mentions of the Fresh Start program. That's because tax relief companies use this program as a marketing hook.
What Is the People First Initiative?
The IRS is almost always updating its tax relief programs and options. The most recent set of significant updates was called the People First Initiative, and it rolled out in early 2020. This was a series of tax relief measures designed to help people during the COVID pandemic.
It stopped the IRS from issuing new liens and levies. It also extended the due dates for many tax returns and allowed taxpayers to suspend their installment agreements. Like the Fresh Start Program, the People First Initiative is not really active anymore. However, the IRS says that it's committed to helping taxpayers work through their compliance issues.
Do You Need Tax Relief Services or Should You Work With the IRS Yourself?
In a lot of cases, you may be able to handle your own tax debt relief. In particular, if you don't owe a lot of money and you agree with the tax liability, you can easily request penalty relief and set up a payment plan on your own. However, if you have a complicated situation or just want help dealing with the IRS, you may want to hire someone to provide tax relief services.
There are big companies that are devoted exclusively to tax relief, but unfortunately, these companies are notorious for subpar practices. The very worst tax relief companies have actually been pushed out of business due to lawsuits and consumer complaints. When you do a Google search or look at review sites, the big nationwide tax firms dominate the results, but they are not the only option. You can also hire a local tax professional to help you.
Take a look at the pros and cons of resolving your tax issues on your own, hiring a tax relief firm, or working with a local tax professional.
|DIY Tax Relief||Free||Can be confusing and stressful. Inexperience may lead to mistakes, including selecting the wrong relief program or not filing the correct forms.|
|Nationwide Tax Relief Firm||Someone to deal with the IRS for you. Help filing forms to apply for tax relief programs.||Can be expensive. Often charge thousands in upfront fees. The industry has repeated instances of theft from taxpayers. Untrained salespeople are typically your first point of contact. Potential lack of knowledge about state tax issues.|
|Local Tax Professionals||Personalized guidance to ensure you select the best tax relief program for your needs. Help applying for tax relief programs. The ability to work directly with a tax professional who is knowledgeable about IRS and state tax issues.||More expensive than doing it yourself. But local tax pros fees are usually worth the cost. These professionals know how to reduce your tax liability and get you the best result possible.|
The Federal Trade Commission advises people who need tax relief to stay away from the big companies. Instead, this consumer watch group recommends taking a DIY approach or hiring a local tax professional.
How Much Does Tax Relief Cost?
Tax relief has varying costs depending on the services you need. The FTC advises you not to work with firms unless they can provide you with clear details about their fee structure.
To learn more, check out our overview of tax resolution costs and tax attorney costs. Or contact a local tax pro directly to talk about pricing.
Get Help Applying for Tax Relief
Are you struggling with back taxes or unfiled returns? Is the IRS threatening collection actions against you? Trying to find the best way out of tax debt? Then, you should reach out to a local tax professional.
TaxCure lets you search for local CPAs, enrolled agents, and tax attorneys. You can look for tax pros who have experience with your state revenue agency and the IRS. You can also filter your results based on the tax problem you're having (for instance, back taxes, unfiled returns, wage garnishments, levies, etc) or by the tax relief you want (such as installment agreement, offer in compromise, currently not collectible, etc).
Then, you can review the results and look at the rankings for different tax pros. You can also call several pros for a free consultation to ensure that you find the best fit for your needs. Don't let tax problems weigh you down — get help from a local tax professional today.