Owing the IRS can be one of the most stressful situations a taxpayer can face. Recent data shows that American taxpayers owed over $316 billion in back taxes, penalties, and interest as of the end of 2022. Much of this debt can be attributed to late filing, mathematical errors, and underreported income. Whatever the reason for owing taxes, many taxpayers may find themselves considering tax relief when their tax bills get too large to pay. Here’s an overview of what tax relief is and how it works.
What Is Tax Relief?
The IRS recognizes that not all taxpayers can pay what they owe in full, so they offer different avenues to settle or reduce tax debt based on individual circumstances. The phrase “tax relief” can mean many things. When speaking of tax debt, tax relief is when your tax debt is managed, settled through negotiations, or paid down with payment plans. Tax relief programs were created for taxpayers who cannot afford to pay their tax bills, as well as those who have overwhelming and overdue tax bills.
How Does Tax Relief Work?
Tax relief is not a “one-size-fits-all” program. Every tax relief program works differently, and the process will also differ depending on the individual taxpayer’s situation. Here we will review the most common tax relief policies and programs.
Offer in Compromise (OIC)
Previously called the Fresh Start program, an offer in compromise is the most popular form of tax relief as well as the least likely option for taxpayers since most OICs are denied by the IRS. An OIC allows you to settle your tax debt for less than what you owe. When selecting OIC candidates, the IRS will examine your ability to pay your tax bill, your income and expenses, and the value of your assets. There are three types of OICs:
Doubt as to Collectibility: When there’s doubt the IRS could collect the full debt.
Doubt as to Liability: When there’s uncertainty about the correctness of the tax debt.
Effective Tax Administration: When collecting the full amount would be unfair or cause economic hardship.
Applying for an Offer in Compromise involves a detailed process, beginning with completing IRS Form 656, “Offer in Compromise.” Alongside this form, taxpayers must submit a comprehensive financial statement detailing income, expenses, assets, and liabilities. There are some basic requirements for an offer in compromise including:
Must pay a $205 nonrefundable application fee
Must make a nonrefundable initial payment
Must be current on all tax returns
Must not be in an open bankruptcy proceeding
If the IRS deems that you cannot afford to pay your tax debt, or that paying your tax debt will result in financial hardship, then it may accept your offer in compromise. If this happens, they will cease collections.
Currently-Not-Collectible (CNC) Status
In some cases, you cannot afford both your tax bill and your expenses. If this happens, you can request a Currently Not Collectible status on your account, which delays collections. The IRS will request information regarding your income and expenses to determine your eligibility. If approved, the CNC status will temporarily cease collections on your account. However, they will continue to assess interest and penalties to your account. They will continue to review your income each year to determine if you are still eligible for CNC status. They can also still file a tax lien against you during this time and keep your tax refunds to apply them to your tax bill.
IRS Installment Agreement
If you can’t pay your tax debt in full but don’t qualify for an OIC, an IRS installment agreement may be a practical solution. An IRS installment agreement lets you pay your tax bill, plus accrued interest and penalties, over a set period of time in monthly installments. There are different types of installment agreements:
Guaranteed Installment Agreement: If you owe $10,000 or less and meet other criteria, the IRS is required to grant this agreement.
Streamlined Installment Agreement: For tax debt of $50,000 or less, you can qualify without submitting detailed financials.
Non-Streamlined Installment Agreement: For tax debt of more than $50,000, you can qualify based on financial information you provide to the IRS.
Partial Payment Installment Agreement (PPIA): This allows you to pay a reduced amount monthly if you cannot afford the full payment but do not qualify for an OIC.
While an IRS installment agreement does not reduce your tax bill, or exclude you from penalties and interest, it might be your next best option to pay off your tax debt.
Penalty Abatement
Sometimes life gets in the way of responsibility. Maybe you didn’t file your taxes for one year, or you forgot to pay your tax bill. Perhaps you were affected by a serious illness or natural disaster. If you have an otherwise clean record with the IRS, you can request a first-time penalty abatement, which waives a tax penalty or refunds you for one already paid for. Typically, if you meet three requirements, you should qualify for this tax relief option.
You are current on your tax return filing. Tax extensions are fine.
You are current on your tax bill or have a payment plan in place.
You have a clean record with the IRS. This means no penalties during the three tax years before the year you received a penalty.
If interest accrued from a failure-to-pay or a failure-to-file penalty, and you receive penalty abatement, then the interest associated with the penalty abatement will also be forgiven.
Disaster Tax Relief
Disaster tax relief provides special tax provisions to help individuals and businesses recover from federally declared disasters. The IRS may offer extended filing and payment deadlines, penalty waivers, and the ability to deduct casualty losses on tax returns. Affected taxpayers can claim disaster-related losses on either the current or previous year’s tax return, potentially receiving faster refunds. Additionally, the IRS may exempt disaster relief payments from taxable income and offer easier access to retirement funds without penalties.
Tax Relief FAQs
Tax relief is a broad subject with several different avenues. If you find you qualify for one or more forms of tax relief, you may still have questions.
How does tax forgiveness work?
Tax forgiveness programs allow taxpayers to settle their tax debt for less than the full amount owed. This can happen through an Offer in Compromise (OIC), where the IRS considers the taxpayer’s ability to pay, income, expenses, and asset equity to decide on a reduced settlement.
Is tax relief a good option?
Tax relief can be a good option if you’re facing financial hardship or have substantial tax debt. It can help reduce the total owed, set up a manageable payment plan, or prevent aggressive IRS collection actions.
Does tax relief affect your credit?
Tax relief itself does not directly impact your credit score. However, if you have an existing tax lien, that can negatively affect your credit. Resolving tax debt could improve your financial standing over time.
How much will the IRS usually settle for?
The IRS generally settles for an amount that reflects your ability to pay, which can be significantly less than the total debt. To determine this, the IRS will consider your assets, income, monthly expenses, savings, and other factors.
How Do I Proceed with Tax Relief?
If one of these tax relief options sounds like they can be of help to your tax situation, you should consider pursuing it. Most of these options require nothing to lose, financially speaking. Dealing with the IRS on your own can be intimidating, time-consuming, and stressful. Working with a tax professional offers several advantages over handling IRS matters independently. For one, tax professionals have expertise that goes beyond basic tax knowledge. This can help you minimize errors, save time and money, and optimize your tax planning. Perhaps the greatest benefit is knowing that a professional is handling the IRS on your behalf. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
Failing to pay your state taxes can lead to a range of consequences, depending on the state you live in and how long the debt remains unpaid. While many are familiar with the penalties for not paying federal taxes, state tax authorities also have enforcement mechanisms to ensure individuals meet their tax obligations. Here’s a breakdown of what happens if you don’t pay state taxes.
Late Payment Penalties and Interest
One of the most immediate consequences of not paying state taxes is the accumulation of penalties and interest. Most states impose a penalty for late payments, often calculated as a percentage of the unpaid tax balance. For example, in California the failure-to-pay penalty is 0.5% of the unpaid tax per month or partial month, with a maximum penalty of 25%. Additionally, interest charges are applied to the outstanding debt, which can quickly increase the amount owed over time. Even if you file your tax return on time but fail to pay, you may still face penalties for not settling the balance.
Notices from the State Tax Authority
When taxes go unpaid, your state tax authority will begin to send you notices. These notices serve as a reminder to settle your balance and provide information on how much you owe, including any added penalties and interest. Ignoring these notices can escalate the situation, leading to more serious enforcement actions.
Tax Liens
If you continue to ignore your state tax debt, the state may place a tax lien on your property. A tax lien is a legal claim against your assets, such as your home or car, to secure payment of your tax debt. Once a lien is in place, it can affect your credit score and make it difficult to sell or refinance your property. Many states will issue a public notice of the lien, which can further damage your financial standing.
Wage Garnishment
Wage garnishment is another powerful tool states use to collect unpaid taxes. If you owe a significant amount, the state can garnish a portion of your wages directly from your paycheck. This means that your employer will be required to withhold a certain amount of your earnings and send it to the state tax authority until your debt is paid off. Unlike some other debts, state tax garnishments often don’t require a court order, making it a quick and efficient collection method. For example, North Carolina allows the Department of Revenue to garnish up to 10% of your wages to recover unpaid taxes. This can continue until the debt is fully satisfied. In Ohio, the state can garnish up to 25% of your disposable income to cover unpaid state taxes.
Bank Levies
In some cases, states can issue a levy on your bank account, allowing them to seize funds directly from your account to cover your unpaid tax debt. Like wage garnishment, a bank levy can occur without a court order. Once a levy is placed on your account, the bank may freeze your funds, preventing you from accessing your money until the debt is resolved.
Seizure of Assets
For severe cases of unpaid state taxes, some states have the authority to seize assets, such as personal property or real estate. This usually happens after repeated attempts to collect the debt have failed. The state can sell these assets to recover the unpaid taxes. Asset seizures are a last resort but can happen if the debt is substantial and all other collection efforts have been unsuccessful.
Loss of Licenses
Some states may suspend professional licenses, driver’s licenses, or business licenses if you fail to pay your taxes. In California, the Franchise Tax Board (FTB) can suspend your professional, occupational, or driver’s license if you owe more than $100,000 in unpaid taxes and have not entered into a payment agreement. In Louisiana, the Department of Revenue can suspend business licenses, such as liquor licenses, for businesses with unpaid taxes. This can have significant impacts on your career and livelihood, especially for individuals in professions that require licensing (e.g., doctors, lawyers, contractors). Losing a business license due to unpaid taxes can also cripple your ability to operate and generate income.
Legal Action
In certain situations, state tax authorities may take legal action against taxpayers who fail to settle their debt. This can result in a court judgment, which could lead to wage garnishment, bank levies, or other enforcement actions. While criminal charges for unpaid state taxes are rare, they can occur in cases involving fraud or intentional tax evasion.
Impact on Credit Report
Unpaid state taxes can negatively impact your credit report if a lien is placed on your property or if the debt is sent to collections. A lower credit score can make it more difficult to qualify for loans, credit cards, or favorable interest rates. It can also affect your ability to rent housing or secure employment in certain fields.
Collection Agencies
If the state tax authority is unable to collect your debt, they may refer your account to a private collection agency. Collection agencies can be aggressive in their pursuit of payment, often adding additional fees and interest to your outstanding balance. This can make it even more challenging to pay off the debt.
What Should You Do if You Can’t Pay Your State Taxes?
If you’re unable to pay your state taxes, taking immediate action is essential to avoid harsh consequences. Many states offer programs to help taxpayers manage their debt.
Payment Plans: Most states allow payment plans for individuals unable to pay their tax bill in full. These plans allow you to pay off the debt in smaller installments over time.
Offers in Compromise: Some states, like California and New York, offer programs where taxpayers can settle their debt for less than what they owe if they can prove financial hardship.
Filing for an Extension: Filing an extension can delay the filing deadline but doesn’t extend the time to pay taxes. This could help avoid late filing penalties but not late payment penalties.
Seek Professional Help: Consulting a tax professional can help you navigate the process of settling your state tax debt, negotiating with the tax authority on your behalf, and exploring hardship or penalty abatement options.
State Tax Help for Those Who Owe
Ignoring your state tax obligations can lead to serious financial and legal consequences, including penalties, interest, wage garnishments, tax liens, and even asset seizure. Each state has its own rules, but the bottom line is that states will aggressively pursue unpaid taxes. If you find yourself unable to pay, it’s crucial to seek assistance, negotiate a payment plan, or explore other relief options before the situation escalates. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief Lead Tax Attorney, Phil, discusses the October tax extension deadline, including his top 3 things to keep in mind.
It’s Never Too Late to File
This year’s tax extension deadline falls on Tuesday, October 15th. If you haven’t got around to filing, remember it’s never too late. The failure to file penalty accrues at 4.5% per month, so the sooner you submit your tax return, the better you can mitigate expensive penalties and interest. If left unchecked, the failure to file penalty can increase your tax balance by 22.5%!
Pay Your Taxes ASAP
If you haven’t paid your taxes yet, it’s crucial to know that penalties and interest have been accruing since the April due date. You should pay your taxes as soon as possible to avoid these extra fees, especially at a time when interest rates are high. Each month the failure to pay penalty can add an additional .5% of your unpaid tax balance and up to a total of 25% if not addressed.
Remember to Pay Estimated Taxes
If you’re self-employed, October 15th isn’t the only deadline you should have noted in your calendar. The Q4 estimated tax payment is due on January 15, 2025. If you miss an estimated tax payment, the IRS may charge you a penalty for underpayment. The penalty is calculated based on how much you underpaid and how long the amount was unpaid, so be sure to get this done on time and correctly. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt.
Join us next Friday as Phil will discuss 3 things the IRS will never do and how to report tax scams.
When taxpayers struggle with large amounts of tax debt, an Offer in Compromise (OIC) can offer a much-needed lifeline. This program, administered by the IRS, allows taxpayers to settle their tax debt for less than the full amount they owe. But a common question arises: Is canceled debt through an OIC taxable income? The simple answer is no—debt canceled through an Offer in Compromise is generally not taxable.
Understanding the Offer in Compromise
An Offer in Compromise allows taxpayers to negotiate with the IRS to reduce the amount of their tax debt. The IRS will accept an offer if it believes the taxpayer cannot pay the full amount. They may also accept it if collecting the full debt would create an economic hardship. Once the IRS accepts the offer, the taxpayer must fulfill the agreed-upon terms. This is usually by making a lump sum or installment payments. Once this is done, the remaining debt is forgiven.
Why Canceled Debt Is Usually Taxable
In many other financial situations, canceled or forgiven debt is considered taxable income by the IRS. For example, if a credit card company cancels a portion of your outstanding balance, the canceled debt is usually reported on a Form 1099-C. You must include it as income on your tax return. This principle applies to most types of canceled debt because the taxpayer is considered to have “received” the amount of the canceled debt, which is typically subject to income tax.
The Exception for Tax Debt Forgiveness
The key difference with an OIC is that the canceled debt stems from taxes owed to the federal government. The IRS does not consider forgiven tax debt as taxable income. Because of this, taxpayers do not need to report it on their tax returns. This makes OIC a unique form of debt forgiveness that is generally not subject to taxation.
Why Canceled Debt Through an OIC is Not Taxable
Canceled tax debt through an OIC is not considered taxable income because of the nature of the debt and how the IRS treats it. If a credit card company forgives debt, the IRS usually taxes that forgiven amount because it’s considered a financial benefit. You don’t have to pay back money you once borrowed. On the other hand, when you owe the IRS, you essentially have an unpaid bill to the government that you are settling for less rather than you financially gaining something. The Offer in Compromise program exists to help taxpayers who can’t afford to pay all their taxes. If the IRS forgave part of your debt and then taxed you on it, that would defeat the purpose of the program. The IRS doesn’t want to make things more difficult for you financially after settling your tax debt.
Conclusion
For taxpayers who secure an Offer in Compromise to reduce their tax debt, the good news is that the IRS does not consider the forgiven amount taxable income. This distinction sets an OIC apart from other types of debt forgiveness, making it a tax-advantaged way to manage overwhelming tax liabilities. As always, taxpayers should consult a tax professional. Ensure you fully understand the consequences of settling your debts and how it affects your overall tax situation. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
The IRS uses a variety of letters to communicate with taxpayers about their tax obligations. One such letter is IRS Letter 3219N. This letter, often referred to as a Notice of Deficiency, informs taxpayers that the IRS has made adjustments to their tax return. These adjustments resulted in additional taxes owed. If you receive this letter, it’s essential to take it seriously and understand your next steps. In this article, we’ll answer the question “What is IRS letter 3219N?” and review your next steps after receiving it.
What is IRS Letter 3219N?
IRS Letter 3219N is sent when the IRS determines there is a discrepancy between the information reported on your tax return and the data the IRS has received from third-party sources. These sources can include employers, financial institutions, or other payers. This discrepancy might be due to unreported income, overstated deductions, or incorrect credits claimed. The letter provides details on the adjustments the IRS made to your tax return. It also explains why additional taxes, penalties, or interest may be due.
Key Information Included in Letter 3219N
Deficiency Amount: This is the amount the IRS believes you owe in additional taxes, penalties, and interest.
Explanation of Changes: The letter will include a breakdown of the changes made to your return. These could relate to unreported income, misreported deductions, or other issues the IRS found.
Response Deadline: You generally have 90 days from the date of the letter to either agree with the IRS and pay the amount due or disagree and file a petition in Tax Court. If you miss the deadline, the IRS can begin collection activities, such as issuing a tax levy or lien.
Tax Court Option: If you disagree with the IRS’s findings, you can file a petition with the U.S. Tax Court before the 90-day window expires. This gives you the opportunity to contest the IRS’s adjustments without first paying the amount due. Note that if you miss the deadline, you lose your right to challenge the tax assessment.
What Should You Do After Receiving Letter 3219N?
Upon receiving IRS Letter 3219N, review it carefully. Compare the information in the letter with your tax return. Double-check the adjustments to ensure that they are correct. If you have supporting documentation to refute the IRS’s claims, gather it for your response in Tax Court. Before heading to Tax Court, you might consider contacting the IRS to resolve the issue directly, especially if there’s an error that can be easily explained. If the dispute cannot be resolved, filing a petition with the U.S. Tax Court is your next step.
However, if after reviewing the letter, you agree with the IRS’s changes, you can pay the amount due by the deadline. The IRS provides payment options, including installment agreements if you cannot pay in full. To prevent future discrepancies and notices, ensure that your tax returns are filed accurately and that you report all income and deductions correctly. Keeping thorough records and reviewing your tax returns carefully before filing can help avoid future problems.
The Consequences of Ignoring Letter 3219N
Ignoring IRS Letter 3219N can have serious financial consequences. If you do not respond within the 90-day period, the IRS will assess the additional taxes, and you’ll lose the opportunity to dispute the amount in Tax Court. Once the IRS assesses the amount, it can start collection activities, including garnishing your wages, placing a lien on your property, or levying your bank account.
Tax Help for Those Who Receive IRS Letter 3219N
Receiving IRS Letter 3219N can be stressful, but understanding its purpose and knowing your rights can help you navigate the situation. Take time to review the notice carefully, respond within the given timeframe, and seek professional assistance if needed to protect your financial well-being. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
