Tax relief consists of negotiating with the IRS or federal tax agencies to get your outstanding tax bill reduced or to agree on a manageable payment plan.
There are many different dedicated tax relief companies out there that can help you negotiate a reduction on your tax debt, and they offer an array of services to achieve this.
Americans may seek tax relief because they don’t have enough cash on hand to pay their tax bill, or they simply want to get their tax debt reduced. They may also want to agree on a payment plan to improve their cash flow and take some financial pressure off.
There are many reasons why Americans, including Boomers and members of other generations, may struggle to pay their outstanding tax bill.
For example, penalties may have incurred to the original debt due to late payment. Interest charges may have caused the debt to balloon over time and end up being unaffordable.
How Can Tax Relief Help Boomers?
Securing tax relief can help Boomers save money by agreeing to pay a lesser amount rather than all of the tax they owe to the IRS and federal tax agencies.
This, in turn, leaves them with more money to save or invest for their fast approaching retirement. Even a relatively small amount of tax savings can go a long way toward improving your standard of living in retirement, especially if you decide to invest that money and grow it over time.
Negotiating a payment plan can also indirectly help you save money, as you’ll avoid late payment fees and other potential financial penalties.
How Can a Tax Relief Company Help?
Utilizing a tax relief company can help you get a better deal with the IRS and other tax agencies to which you owe money.
A tax relief company has experienced professionals – such as tax attorneys and enrolled agents. They specialize in securing the most favorable deal for their clients, which can include a significant amount of tax relief, an extension to repay your tax bill, and much more.
Keep in mind that dedicated tax relief companies charge a fee for their services. However, it still often works out more cost-effective to have them negotiate a deal on your behalf, especially if they have a track record of negotiating large tax relief packages for their clients.
Ways to Reduce Your Tax Bill
Many different arrangements can be negotiated with tax agencies to make it easier for you to pay off your tax bill. Read on for an overview of some of the most popular and effective arrangements and relief packages.
IRS Fresh Start Program
Set up in 2011, the IRS Fresh Start Program is essentially an installment plan designed to make it as easy as possible for people facing financial hardship to pay off their tax bill. If you qualify for the program, you will be able to avoid tax liens, penalties, seizure of assets orders, and more while gradually paying your tax obligations.
The program is only accessible to people who have successfully filed all of their taxes and have not entered into another repayment plan with the IRS over the past five years.
To qualify for Fresh Start, you also need to owe less than $50,000 and not be earning a salary of over $100,000 per year, though the IRS does sometimes offer limited flexibility on these requirements.
Offer in Compromise
Getting an offer in compromise is often the best way to get your tax repayments in order, but not everyone is eligible for this kind of tax relief agreement.
An offer in compromise essentially consists of you or a dedicated tax relief company negotiating a deal with the IRS to reduce your outstanding tax bill.
When deciding whether or not you qualify for a reduction in your tax liability, the IRS will look at the state of your finances – including your monthly inflows and outflows, and the assets you own – to determine how much you can afford to pay.
It usually takes the IRS a matter of months to consider and reject or approve your application. You’ll then have a maximum of two years to repay the amount you owe, or you can pay it off in one go as a lump sum.
The level of tax relief the IRS grants for successful offers in compromise applications varies massively depending on your finances, so it’s difficult to estimate your savings.
Keep in mind that it costs $205 to file an offer in compromise application, not including the fees you’ll have to pay if you use a dedicated tax relief firm. But you may be able to get this fee reduced if you qualify for low-income certification.
Penalty Abatements
The IRS may slap a taxpayer with a financial penalty (which adds to their tax liability) for several reasons, including being late for a tax payment or missing the deadline to file your taxes.
However, penalty abatements can be negotiated to reverse some or all of these financial penalties and thus reduce your total tax bill.
It’s strongly advisable to pay off any tax penalties you’ve incurred asap as they compound over time. You can then apply for an abatement (you will receive a rebate if you are successfully awarded an abatement for a penalty you’ve already paid.)
Note that you can only qualify for a penalty abatement if you hadn’t incurred a penalty in the three years prior to taking the penalty.
Installment Payments
Even though you don’t get any explicit relief on your tax liability, negotiating a deal to pay off your tax bill in monthly installments can prove very helpful for Boomers who are struggling financially.
The installment repayment plans which the IRS offers are split into short term and long term plans. Each has different requirements, but you can always get an installment agreement if your outstanding tax bill is less than $10,000, and you’re able to pay it off within three years.
To qualify for a short term repayment plan (paying off your tax liability within 120 days), your total tax liability must not exceed $100,000.
As for a long term repayment plan, you can only qualify if you have an outstanding tax liability of $50,000 or less.
Remember, these tax liabilities include penalties and other extra charges that the IRS has added.
Joint Tax Relief
If you file your taxes with a spouse (or have done so in recent years), you may be able to secure some tax relief. There are various types of joint tax relief, but they all rely on you or your spouse having inaccurately or improperly filed your taxes.
Some of the most popular types of joint tax relief include innocent spouse relief, equitable spouse relief, and separation of liability relief.
Currently Not Collectible Status
Securing a currently not collectible status is an effective way to protect yourself against an IRS levy, lien, asset seizure, or a suspension/termination of an installment payment agreement.
You can only get a currently not collectible status – sometimes referred to as a hardship extension – if the IRS determines that you can’t realistically pay off your outstanding tax liability as doing so would eat into the money you need for basic living expenses and necessities.
How Much Does Tax Relief Cost?
The amount a dedicated tax relief firm will charge you is dependent on the company you use and the complexity of your case. Due to these variables, you’re looking at spending anywhere from a few hundred dollars to over $10,000, but most cases end up costing $1,500 to $3,000.
Keep in mind that in addition to the fees you pay the company that negotiates with the IRS and other federal tax agencies on your behalf, you’re also responsible for any application processing fees.
Although paying a company to negotiate tax relief on your behalf can be quite expensive, it often works out better. They can usually negotiate a much more favorable deal due to their experience of negotiating such agreements with tax agencies.
Is Tax Relief Right For Me?
Suppose you have a significant outstanding tax liability. In that case, it’s worth having a consultation with a tax relief company to see if they can help you reduce your tax bill or at least help you secure more favorable and manageable payment terms.
Other Ways to Settle Your Tax Debt
Aside from negotiating tax relief, there are many other ways to settle your tax debt.
Depending on your circumstances, these alternatives may be better suited to you. However, some of them have many drawbacks with long term consequences, so it’s essential to consider all your options before making a decision carefully.
Bankruptcy
In some cases, you can eliminate your tax liability by filing for Chapter 7 bankruptcy. Keep in mind that your tax debt must be older than three years, and you must have completed a tax return for the outstanding amount to be canceled.
While filing for bankruptcy may seem like the easiest option, it can be a time-consuming process, and you will find it almost impossible to get access to most types of credit in the coming years.
Credit Card Payment Providers
While the IRS doesn’t allow you to directly pay off your outstanding tax bill with a credit card, there are a few licensed payment processing companies that accept such payments on behalf of the IRS.
These companies charge a fee for their service. You may also need to pay interest to your credit card company until you clear the balance, so be sure to consider all of these costs when deciding if it’s the most cost-effective option available to you.
Statute of Limitations
Finally, you can wait for the ten-year statute of limitations on money owed to the IRS. However, you should note that it can often take much longer than ten years for this debt forgiveness to occur, as the process can be suspended several times while you wait for the statute of limitations to expire.
Final Thoughts
Handling your tax affairs can be quite tricky and stressful, especially if you are under pressure due to IRS penalties and interest fees mounting while you pay off your tax liability.
Negotiating a favorable tax relief deal with the IRS or federal tax agencies can be a lifeline for many Americans, including Boomers, so it’s certainly an option worth considering.
As with any financial decision, it’s smart to shop around and compare different tax relief firms before choosing one to handle your case. Also, consider if you could negotiate directly and save yourself a considerable amount of money in fees.