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 their tax debts in full, so it offers formal tax relief programs that include payment extensions, penalty abatement, and debt reduction options tailored to individual circumstances. “Tax relief” encompasses managing or settling tax debt through negotiations, payment plans, or programs created for taxpayers facing financial hardship or overwhelming tax bills.
Types of Tax Relief
Tax relief can come in several forms, including tax deductions, tax credits, and tax exemptions, all aimed at easing the financial strain on taxpayers.
Tax Deductions
Tax deductions reduce your taxable income, which can lower the amount of taxes you owe. For example, if you earn $50,000 and claim a $1,000 deduction, your taxable income becomes $49,000. Common deductions include:
- State and local taxes (SALT)
- Mortgage interest
- Charitable contributions
- Medical and dental expenses
Other Deductions
Some deductions fall outside the standard or itemized deduction categories but can still reduce your income. These include:
- Student loan interest
- Educator classroom expenses
- Contributions to a Health Savings Account (HSA)
- Traditional IRA contributions
Tax Credits
Tax credits directly reduce your tax bill dollar for dollar, unlike deductions, which reduce your taxable income. For example, a $1,000 tax credit will lower your tax bill by $1,000. Some credits are refundable, meaning if the credit exceeds your tax bill, you can receive the difference as a refund. Others are non-refundable, which means they only reduce your bill to zero but don’t generate a refund for any leftover amount.
Common tax credits include:
- Child Tax Credit
- Earned Income Tax Credit (EITC)
- American Opportunity Tax Credit (AOTC) for higher education
- Energy-efficiency tax credits for eligible home improvements
Tax Exemptions
Tax exemptions allow certain income or individuals to be excluded from tax altogether. Although personal and dependent exemptions were eliminated after the 2017 Tax Cuts and Jobs Act, exemptions still exist in other areas:
- Non-profit organizations may be granted tax-exempt status under IRS Code 501(c)(3)
- Some investment income may be exempt from federal taxes, such as municipal bond interest
How Does Tax Relief Work?
Tax liability 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)
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.
Innocent Spouse Relief
Innocent Spouse Relief is a provision by the IRS designed to protect taxpayers from being held liable for the tax, interest, or penalties associated with their spouse’s (or former spouse’s) improperly reported or omitted income on a jointly filed tax return. When you file a joint tax return, both spouses are generally responsible for the tax liability. However, this relief allows one spouse to seek protection if the other spouse’s actions caused the tax issue without their knowledge or involvement.
To qualify, you must meet these general conditions:
- Joint Tax Return: You filed a joint return that has an understated tax due to an error by your spouse or former spouse.
- No Knowledge: At the time of signing the return, you did not know, and had no reason to know, about the error.
- Inequity to Hold You Liable: Holding you responsible for the understatement of tax would be unfair based on the circumstances.
- Timely Request: You must request relief by filing Form 8857, Request for Innocent Spouse Relief, within two years of the IRS initiating collection actions.
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.
In federally declared disaster areas, some relief payments may be excluded from taxable income if used to cover necessary personal or living expenses, funeral costs, or home repairs. Additionally, taxpayers can claim casualty loss deductions, even if they don’t itemize, by amending the previous year’s return or claiming the loss in the year it occurred to accelerate refunds.
IRS Fresh Start Program
The IRS Fresh Start Program isn’t a single relief option. Instead, it’s a collection of initiatives designed to make it easier for taxpayers to get back on track. Introduced in 2011, it expanded access to Offer in Compromise, eased penalty abatement rules, and improved payment plan availability.
Under Fresh Start:
- Taxpayers may qualify for expanded installment agreements without needing detailed financial records.
- Penalty abatement is more accessible for first-time offenders and those with reasonable cause.
- OIC eligibility has been broadened to help more individuals settle for less than the full tax owed.
If you’ve fallen behind on taxes, the Fresh Start Program can help reduce financial pressure and open up realistic paths toward compliance.
Benefits of Working with Optima for Your Tax Debt Relief
If you’re in need of tax relief help, you’ve probably considered hiring a tax professional, like a tax attorney or enrolled agent. While you can go toe-to-toe with the IRS on your own, working with a tax relief company like Optima Tax Relief has several benefits.
Working Directly with the IRS
- Complexity: Tax laws and IRS procedures can be challenging to understand, especially for individuals without prior experience.
- Emotional Stress: Dealing with the IRS can be intimidating and anxiety-inducing, particularly when facing large tax debts or potential legal consequences.
- Time-Consuming: Resolving tax issues involves extensive research, paperwork preparation, and communication with the IRS, taking significant time and effort.
- Risk of Errors: Mistakes in filing or incomplete documentation can result in denied applications, additional penalties, or prolonged resolution times.
Working with Optima Tax Relief
- Expertise: Optima’s tax professionals and enrolled agents are well-versed in IRS procedures with more than a decade’s worth of experience ensuring accurate and compliant case management.
- Representation: Optima serves as a buffer between clients and the IRS, minimizing stress by handling all communications on their behalf.
- Tailored Solutions: Optima analyzes each client’s financial situation to recommend the most effective tax relief programs for their needs.
- Time Efficiency: Optima expedites the resolution process by submitting complete, error-free documentation and maintaining effective communication with the IRS.
The Role of Optima Tax Relief Professionals
Managing complex tax issues can be intimidating, stressful, and exhausting. Experienced tax professionals provide expertise to help you navigate and resolve tax-related problems with confidence. Here’s how Optima Tax Relief tax professionals can make a difference.
Comprehensive Understanding of Tax Laws
Optima’s tax attorneys possess a deep understanding of both federal and state tax codes, allowing us to provide customized solutions for each client’s specific needs. Our expertise ensures compliance with current regulations and identifies the most effective strategies to resolve disputes efficiently and effectively.
Skilled Representation and Advocacy
Optima’s attorneys handle all IRS interactions, audits, and appeals on your behalf, alleviating the stress of managing these challenges alone. We act as your advocate, protecting your rights and striving to achieve favorable outcomes, such as reduced penalties or flexible payment terms.
Effective Negotiation Skills
Optima excels at negotiating with the IRS to secure beneficial resolutions, including:
- Offers in Compromise: Settle your tax debt for less than the amount owed.
- Penalty Relief: Reduce or eliminate accrued penalties.
- Installment Agreements: Establish manageable payment plans tailored to your financial situation.
Confidential and Trusted Service
All communications with Optima’s attorneys are protected by attorney-client privilege, ensuring complete privacy for your financial matters. This allows clients to share sensitive details with confidence, knowing the information will remain secure.
Expertise in Complex Cases
Optima’s attorneys are equipped to handle intricate tax issues, including large debts, international tax challenges, and allegations of fraud. Our experience and precision offer reassurance to clients facing high-stakes situations.
Reliable and Transparent Support
From your first consultation to the final resolution, Optima provides consistent updates, answers all questions, and ensures you understand each step of the process. Our dedication to transparency builds trust and confidence, making Optima a dependable partner in addressing tax challenges.
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.
Does the IRS forgive tax debt after 10 years?
Yes, the IRS generally forgives tax debt after 10 years due to the Collection Statute Expiration Date (CSED), but this period can be extended by events like bankruptcy, offers in compromise, or time spent outside the U.S. Once the 10 years expire, the IRS can no longer collect the debt.
How can I stop IRS wage garnishment?
You can stop IRS wage garnishment by paying your tax debt in full, setting up an installment agreement, submitting an offer in compromise, or proving financial hardship to qualify for currently not collectible status. Contacting the IRS or working with a tax professional can help expedite the resolution process.
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.
Are there tax relief options for disaster victims?
Yes, disaster victims may qualify for tax relief such as extended filing and payment deadlines, waived penalties, and deductions for uninsured losses. The IRS often provides specific guidance and updates for affected areas.
What happens if I can’t pay my taxes?
If you can’t pay your taxes, the IRS may charge penalties and interest, but you can explore options like installment agreements, offers in compromise, or currently not collectible status. It’s important to file your tax return on time to avoid additional penalties.
How do I claim and document education-related tax credits?
File Form 8863 with your return and use Form 1098-T to claim education credits like the AOTC or LLC. Keep receipts for tuition and required materials.
Which specific expenses qualify for itemized deductions in 2025?
Qualifying 2025 deductions include SALT (up to $40,000), mortgage interest, medical expenses over 7.5% of AGI, charitable donations, and disaster losses.
How often and by how much do standard deduction limits adjust for inflation?
Standard deduction limits adjust yearly for inflation. For 2025, they rose to $15,000 (single) and $31,500 (married filing jointly).
Can taxpayers use both an Offer in Compromise and an Installment Agreement concurrently?
No. Submitting an Offer in Compromise suspends any existing Installment Agreement during IRS review.
What financial records must I submit with Form 656 for an Offer in Compromise?
Include Form 433-A or 433-B (OIC) with income, expenses, bank statements, pay stubs, and asset details.
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.
If You Need Tax Help, Contact Us Today for a Free Consultation