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How Does Tax Relief Work?

Do you have a tax bill from the IRS this year? You're not alone. A government study estimates that as many as 21% of tax filers may not have had enough taxes withheld in 2018.

But what happens if you owe Uncle Sam and you don't have enough money to pay your bill? Thankfully, if you find yourself in this unpleasant situation, there's no need to panic. The IRS has several tax relief options available that could help you.

Tax relief can allow you to break down your debt into payments or reduce the amount of tax you pay to the government. No, tax relief won't wipe out your tax bill—and it could cost you more in the long run—but it might make paying what you owe to the federal government a lot more manageable.

What Is Tax Relief?

Tax relief really means setting up a payment plan or negotiating a settlement with the IRS—it's not about erasing your tax obligation. Rather, it's about making it easier to take care of the tax debt you owe.

Victims of natural disasters, such as hurricanes and wildfires, are sometimes offered special tax relief as well. Disaster victims may qualify for deadline extensions and may be eligible to claim casualty losses on their federal income tax returns. You can learn more about special tax relief on the IRS' website.

Ways to Get Tax Relief

When it comes to strategies for managing taxes you can't afford to pay in full when they're due, you have several options. Below are four methods to consider.

  • IRS Repayment Plan
    The IRS may allow you to break down your full balance into smaller payments. To qualify for a long-term payment plan (paying over 120 days or longer), you need to owe $50,000 or less in combined taxes, penalties and interest. For a short-term payment plan of 120 days or less, your tax bill can be as high as $100,000.

    Although IRS payment plans can be helpful if you don't have the funds to cover your tax bill in full, they come with a cost. Depending on the option you choose, you may pay a setup fee of up to $149 plus penalties and interest until your balance is completely paid.

    Need more information about IRS repayment plans? This IRS FAQ page may help.

  • Offer in Compromise
    If you're struggling to pay your full tax bill, the IRS might allow you to settle your tax debt for less than you owe through what is known as an offer in compromise. Per the IRS, an offer in compromise "may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship."

    When reviewing your application for an offer in compromise, the IRS will consider factors such as:

    • Your ability to pay
    • Your income
    • Your expenses
    • Your assets

    To see if you qualify to settle your tax bill for less, check out the IRS Offer in Compromise page. You can also use the Offer in Compromise Pre-Qualifier online to confirm your eligibility and prepare your preliminary proposal.

  • Penalty Relief or Interest Abatement
    There's a chance you may qualify for penalty relief from the IRS. This means that the IRS forgives the penalties you've been charged on your tax bill if you meet certain criteria, such as not having any penalties for the past three tax years or paying or arranging payment for any taxes owed. You will still owe your taxes even if you qualify, but your overall debt will be lower once the penalties are removed from your outstanding balance. For more information, check out the IRS guide on penalty relief.

    Interest abatement, or forgiveness on the interest you owe toward unpaid taxes, may be available as well, but it's rare.

  • Personal Loan
    Another option to consider if you don't have the funds available to pay your tax bill is taking out a personal loan. Determine whether you can secure a personal loan for less than an IRS payment plan offer before going this route. If you do opt to use a personal loan to pay for your tax obligation, research loan rates and terms and make sure you're getting the best rate available. It can also be helpful to check your credit reports before you apply to know what lenders will see when they review your application.

What About Tax Relief Companies?

Tax relief companies regularly use the internet, radio and television to advertise their services to struggling taxpayers. Essentially, tax relief companies work by negotiating with the IRS on your behalf—for a fee. That fee can reach into the thousands of dollars, with no guarantee that they'll be any more successful than you'd be if you negotiated with the IRS on your own.

If you hire a reputable tax relief company to work on your behalf, they may contact the IRS to try to negotiate an offer in compromise, installment agreement, or penalty or interest abatement.

If you prefer to have a third party represent you, make sure you hire a reputable and qualified tax professional. The Federal Trade Commission (FTC) cautions that only certain tax professionals have the authority to represent you with the IRS. These include:

  • Enrolled agents (federally authorized tax practitioners who can represent taxpayers before the IRS)
  • Certified Public Accountants (CPAs)
  • Attorneys

When hiring a third party to represent you, be on the lookout for high upfront fees, unfavorable refund policies, and default billing rates that kick in if you decide to cancel.

Furthermore, the FTC recommends that you meet face-to-face with any tax professional you're considering hiring. Ask them to explain your options and the company's fee structure in detail before you pay anything or sign an agreement.

Preventing Tax Identity Theft

In addition to taking care of your outstanding tax obligations, it's also important that you be on alert for any signs of tax-related identity theft. If you've ever lost your wallet, had your mail stolen, or had personal information compromised in a data breach, you may be at risk.

To help protect your identity at tax time, here are a few best practices to follow:

  • Keep your Social Security card and any documents containing your Social Security number in a safe place. (It's better not to carry these documents around with you.)
  • Don't give out your personal information, such as Social Security number, date of birth and so on, over the phone or online unless you initiated the contact and you know you're communicating with a reputable organization.
  • Consider requesting an Identity Protection PIN from the IRS, if you're eligible.

For more information, see "Protecting Yourself From Tax Time Identity Theft." And, if you think you might be a victim of tax identity fraud, see "What to Do if You're a Victim of Tax Identity Theft."

How Do Unpaid Taxes Affect My Credit?

If you're worried about the tax bill you owe the federal government hurting your credit scores, don't be. Tax liens are no longer included on your credit reports. This means they will not have an influence upon your ® Score or VantageScore®.

You should be aware, however, that just because tax liens are missing from your reports doesn't mean they can't cause you problems when you apply for a loan or other types of financing. Some lenders may check public records reports, and your unpaid tax liens could show up there. In addition, if your tax payments affect the rest of your financial picture and cause you to get behind on other bills, your credit scores could be affected.

The Value of Being Proactive

Remember, trying to hide from your tax bill won't help you. In fact, as interest and fees continue to pile up, you'll only make your tax problem worse by trying to ignore it.

Be proactive, file your taxes, and reach out to the IRS to see which options you have available. You can consult with a reputable tax professional if you feel overwhelmed, but also know you have the right to reach out to the IRS on your own.

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