What Is Tax Relief?
Tax Relief is a program designed to reduce the amount of taxes paid by individuals or businesses. It involves a universal cut by the IRS that benefits specific cohorts of taxpayers and involves the deduction of expenses, tax credits, and other benefits associated with your taxable income.
Tax relief may take one of the various forms when it comes to filing taxes. You can reduce your tax liability by:
- Tax Deductions – This is a legal reduction in tax relief that offers federal tax reductions on your taxable income as a result of expenses such as mortgage interest rates. It reduces the taxable income of an individual or a business. For example, if your single filer’s taxable income for 2020 was $75,000 you would owe $12,500 in federal income tax. Nonetheless, if you qualify for a $4,000 tax deduction, the tax amount will be computed as $75,000 – $4,000 = $71,000 in taxable income. Your federal taxable income will be reduced to around $11,125.
- Tax Credits (also called Tax Incentives) – This is another category of tax relief and provides more savings compared to tax deductions. It is directly subtracted from the total tax amount after all deductions have been calculated. Tax credits are also known as tax incentive as it compensates for expenditures that the government finds significant. For instance, the Lifetime Learning Credit programs permit credits for people who indulge in postsecondary education programs.
- Tax Benefits (such as enrolling in a tax-free IRA or Individual Retirement Account) – These are also referred to as exclusions and they categorize specific types of income as tax relief which lessens the amount of tax you pay. The most common exclusion is the employer-based health insurance payment program. If an employer receives healthcare benefits, the taxable income is lowered at the end of the pay period, which reduces the tax owed.
Regardless of the form of tax relief you need, it will normally reduce your tax debt and help prevent any payments that are related to a tax underpayment or tax evasion penalties. The next section will give you a brief overview of tax penalties and how they may be imposed.
Common Causes of Tax Stress: Penalties
Some people find that the easiest way to avoid tax evasion penalties, or an infraction that results in a tax underpayment penalty, is to seek advice from an income tax relief professional. The 2 main tax penalties usually imposed on taxpayers include –
- Failure-to-file penalties, imposed for not filing a tax return by the due date. These penalties levy a rate of 5% on the tax still owed for a month or the part of a month the return remains late. You may have to pay as much as 25% of the owed amount.
- failure-to-pay penalties amount to 0.5% of the unpaid tax if a return is filed but the tax goes unpaid by the tax due date. The rate jumps to 1% if the tax has not yet been paid after 10 days, or after the IRS gives the taxpayer a Notice of Intent to Levy Property.
Some people who signed an installment agreement with the IRS reduced their assessed penalty.
Interest on Unpaid Taxes
The interest on unpaid taxes is assessed from the due date of the tax return until the amount is paid in full. The interest is calculated quarterly, at the current federal short-term rate plus 3%. This amount accumulates or accrues daily.
Payments are applied to the tax owed, then to the penalties and interest.
Preventing Tax Penalties
To prevent penalties, take advantage of income tax relief options, such as deductions, credits, and exclusions. If you are a business, you need to make estimated tax payments. If you don’t make the required quarterly estimated payments by the due date, the IRS can penalize you.
Getting Tax Relief and Making a Plan: Installment Agreements
If you are not sure about your tax debt, you can check to see if you have an outstanding balance with the IRS by going to IRS.gov/account. You can sign up in about 15 minutes and you only need to provide your identity once.
If you already know your tax debt, you can either make payments or learn more about seeking tax forgiveness in the form of a tax compromise. Many find it important to do research and use a tax relief guide at each step to be thorough.
Making Payments to the IRS
The IRS features 2 types of payment plans – short-term and long-term.
A short-term payment arrangement covers a period of up to 180 days. Automatic withdrawals can be made from your checking account or you can pay with a debit/credit card, money order, or check. The maximum you can owe in taxes, penalties, and interest is $100,000.
If you owe $50,000 for taxes, penalties, and interest, you can make long-term payment arrangements of 120 days or more. Because of COVID-19, the IRS extended the period from 120 days in November 2020.
If you choose to pay by automatic withdrawal, you will be charged a fee of $31 to apply online and $107 if you elect to apply in-person, by mail, or by phone. These fees are waived for low-income applicants.
If you choose another payment method, other than automatic withdrawals, you have to pay $149 to apply online or $225 to apply in-person, by mail, or over the phone. The fees are lowered to $43 for low-income payers and may be refunded in some cases.
The form of payment used for installment accounts is called a Direct Debit Installment Agreement (DDIA).
What to Keep in Mind when Paying the IRS
Keep the following in mind if you choose to make payments to the IRS:
You still have to pay the interest and penalties and interest you owe if you make payments to the IRS. Arranging a payment plan does not lead to tax forgiveness in this respect.
If you owe more than $25,000 in taxes, payments must be made by automatic withdrawal from
your checking account.
You may also be eligible for an offer in compromise or may be able to arrange a settlement that is lower than your current tax. An offer in compromise is helpful if you claim financial hardship or simply cannot pay the entire tax amount.
Applying for an Offer In Compromise
To apply for an offer in compromise with the IRS, the following needs to take place.
You need to submit an offer in compromise using IRS Form 656-B.
You will be assessed a non-refundable $205 fee unless you are low-income. In this case, you can get a waiver.
You will need to make a non-refundable initial payment.
You should be current on all your tax returns. If you have not filed tax returns for some time, you may not be eligible.
The IRS has the right to maintain current tax liens until your offer is accepted or you have fulfilled the agreement and paid the owed tax.
You cannot apply for tax forgiveness and a tax compromise if you are currently involved in a bankruptcy proceeding.
Once you file an application for an offer in compromise, all collection activities by the IRS will stop.
If your application is accepted, some information for your offer in compromise will be made public, including your name and residential or business location. Your tax liability and offer terms will also be made part of the public record.
Rejections of your offer can be appealed after 30 days.
What are the ramifications of not repaying tax debts?
The IRS has several mechanisms for dealing with tax evasion. They can decide whether to use any or all of the discussed options below:
- The IRS will continue to pursue payment
- Activation of the IRS Automated Collection system
- The IRS will charge you interest on your tax bill
- Penalties imposed will increase the size of your debt
- Acquisition of any funds that the IRS gets
- Extreme cases may lead to loss of passport privileges
- The IRS will continue to pursue the taxes they are owed
While the ramifications of not paying your back taxes are serious, tax relief companies can show you why it is to your benefit to avoid this. Be sure to thoroughly review tax relief companies to get great insights.
How do unpaid taxes affect my Credit?
Nowadays, unpaid taxes do not have an impact on your credit. This is because tax liens do not show up on credit reports which do not directly have an influence on your credit status. In addition, credit scores are computed based on your performance in credit reports that are compiled by the national credit bureaus such as Equifax or TransUnion.
What can the IRS do if you owe back taxes?
Back taxes are funds that you owe the IRS and have not been paid on the due dates. They are subject to penalties and interest and serious legal actions can be deployed if they remain unpaid. Some of the common actions include tax liens, wage garnishments, or even prison time. Such actions depend on the circumstance you are in. In other cases, the IRS may seize property, assets or press charges.
Is it better to work directly with the IRS or hire a professional tax relief company?
The IRS offers free tax help by computer, television, or in person. They also help you get forms and publications and provide answers to a wide range of tax questions. However, an IRS interview might run your nerves with numerous questions regarding your situation. That’s why it’s recommended to always have a tax attorney to help you.
Professional tax relief companies have free consultations which provide answers to your questions. They also send their agents to talk to the IRS on your behalf. However, they have additional costs and may take longer to come up with a solution.
Choosing a Tax Relief Company
Needless to say, the IRS tax law is both complicated and complex. That is why you may want to consider getting assistance from a professional income tax relief service provider. The best tax relief companies assisted millions of clients to navigate through the tax system easily, mainly supporting their efforts in finding the right tax solutions for them.