Tax Relief- Individual Taxpayer

Without question, the IRS can be an unforgiving burden on taxpayers who owe back taxes. Wage garnishments, bank levies, and tax liens are a few of the tools the IRS uses to collect. Taxpayers often go to worse case scenario when dealing with the IRS. Questions such as will I lose my house or will I go to jail are not uncommon questions arising. Furthermore, taxpayers are often afraid to confront the IRS when dealing with a tax issue. However, taxpayers should be aware of their bill of rights and not be afraid to negotiate with the IRS. In the following paragraphs, we will discuss common approaches that are available to taxpayers to help relief their tax burden.

 

Offer in Compromise– An offer in compromise is an agreement between the taxpayer and IRS to settle a tax liability. The end result of an offer in compromise is to settle the outstanding tax liability which is in the IRS and taxpayer’s best interest (i.e. the IRS no longer needs to pursue the case and the tax liability is discounted to the taxpayer). This method is often used by the IRS as a way to collect some taxes rather than the taxpayer declaring their tax liability is “Currently Not Collectible” or filing for an installment agreement. The IRS will look at the taxpayer’s ability to pay, assets, & equity to determine if you qualify. For example, a taxpayer with very low income with a very high debt to equity ratio is more likely to be approved than a taxpayer with a very high income and many assets. Furthermore, all taxpayers must be current with all tax filings and not be in bankruptcy proceedings. While collectability doubts are common among low income taxpayers, there are special circumstances in which middle or even high income taxpayers may qualify. For example, taxpayers facing health hardships such as serve chronic diseases may be able to qualify as well.

 

Penalty Abatement– An often overlooked area of a tax liability collection are penalties and interest. The IRS standard protocol charges interest and penalties on all outstanding tax liabilities. Penalties may have arisen because of a late filed tax return, underpayment of tax reported, or mistakes on your tax return. Penalties and interest continue compounding until the tax liability is satisfied. Thus, the longer a tax liability remains unpaid, the large and larger the balance becomes. The IRS has a program called “First Time Penalty Abatement”. Taxpayers who meet the following three criteria will qualify for the program:

  1. You did not previously have to file a return or you have no penalties for the three tax years prior to the tax year in which you received a penalty.
  2. You filed all currently required returns or filed an extension of time to file.
  3. You have paid, or arranged to pay, any taxes due.

Taxes and interest may represent up to 50% of the balance a taxpayer owes to the IRS. Under the “First Time Penalty Abatement” program, a taxpayer may be able to have all penalties and interest dropped.

 

Installment Agreement– Often times, taxpayers put off paying tax liabilities due to the fact that they are unable to pay in full. An installment agreement is just as it sounds, negotiating with the IRS to make a payments on your tax liability of the course of time (usually 60 months). Opting into an installment plan will stop any wage garnishments, bank levies, and tax liens. Furthermore, you are able to discuss the terms of the installment agreement with the IRS. Thus, you do not have to pay more than you can reasonably afford. Recent changes to IRS policy have made it easier for taxpayers to qualify for this program. The “IRS Fresh Start” policy expanded access to the streamlined installment agreement. Taxpayers owing up to $50,000 can pay through monthly direct debit payments. Lastly, this program broadened the definition of offers in compromise. With the relaxed definitions, more and more taxpayers are now able to qualify for this program.

 

Innocent Spouse Relief­- A lesser-known program is Innocent Spouse Relief. Many married taxpayers choose to file a joint tax return due to the tax benefits from this filing status. While filing jointly, both the taxpayer and spouse are jointly and severally liable for the tax. This is true even if they later divorce. Joint and several liability means that both the taxpayer and spouse are responsible for the entire tax liability, even if one spouse makes all the money. Thus, a spouse who does not make any money could be potential responsible to pay tax on their partner’s unreported income. This becomes a problem when the spouse does not have the funding available to satisfy the tax liability. There are three types of relief from this situation

  1. Innocent Spouse Relief- provides relief from additional tax you owe if your spouse failed to report income, or reported income improperly.
  2. Separation of Liability Relief- allows separate allocation of additional tax owed between spouses.  You are only responsible for your portion of the tax liability due
  3. Equitable Relief- This relief applies when the tax liability reported is correct however, the tax liability was never paid.

 

State Tax Issues– Often overlooked are state tax issues. State taxing authorities often base their tax off of IRS findings. Thus, if an IRS audit determines additional taxes are owed, best believe that the state taxing authorities will be made aware of this information. Furthermore, state taxing authorities may not share the same tax relief programs as the IRS. While each state is different, it is important not to overlook state tax liabilities. It is recommend to looking into your state’s tax relief programs (a call to your state’s Dept. of Revenue will answer many questions you have). State taxing agency have their own penalties and interest charges as well. Thus, if the IRS requires you to amend your federal tax return due to unreported income, it is best practice to amend your state tax return as well to factor in these changes.

 

In summary, there are many different programs offered by the IRS when a tax liability is owed to the IRS. Do not be afraid when dealing with these issues. The IRS is often willing to negotiate and they are required to compromise by law. Without a doubt, the IRS can be burdensome on taxpayers who owe back taxes. Wage garnishments, bank levies, and tax liens are a few of the tools the IRS uses to collect. However, using the programs above, taxpayers are often able to greatly reduce the tax liability owed to the IRS.