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How Tax Relief Works

how tax relief works

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 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) 

An OIC 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. 

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 

An IRS installment agreement lets you pay your tax bill, plus accrued interest and penalties, over a set period. There are two types of IRS installment agreements: short-term and long-term. A short-term payment plan must be paid in 180 days or less. To qualify for a short-term installment agreement, you cannot owe more than $100,000 in combined tax, penalties and interest. A long-term payment plan can be paid over 180+ days. To qualify for a long-term installment agreement, you must not owe more than $50,000 in combined tax, penalties and interest. 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. 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. 

  1. You are current on your tax return filing. Tax extensions are fine.  
  2. You are current on your tax bill or have a payment plan in place. 
  3. 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.   

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 has a team of dedicated and experienced tax professionals with proven track records of success.  

If You Need Tax Help, Contact Us Today for a Free Consultation