Taxes can complicate many personal finance situations, especially if you are behind reporting them to the IRS. There are many reasons consumers fall behind on reporting; whether significant life events set you back or you don’t receive all of your documentation in time, getting caught up on your taxes can be time-consuming and difficult.
IRS penalties can add insult to injury since they can negate refunds and credit you may be entitled to, which can change your tax bill by thousands of dollars.
While the prospect of IRS penalties can seem intimidating, there are many solutions at taxpayers’ disposal to alleviate some of the tax pressure and enable them to get ahead on their balances.
Back Taxes
Back taxes are one of the most common tax situations because millions of Americans fail to file their taxes annually. Simply put, back taxes are any taxes owed to the IRS past the filing deadline. While there may not be immediate repercussions for missing a tax deadline, the IRS can send you an updated bill or pursue other collections methods if they choose to take action against someone who owes back taxes.
The IRS is the most powerful collections agency globally, and they can collect money from people in ways other collections agencies can’t. For example, they have the power to garnish wages. This means if you have an employer, they can take a percentage of your paycheck before you get it until your tax bill is paid in full. They can also put a lien on your property, making selling a house or car difficult. Finally, they can levy your assets which means your personal property or investment accounts could be fair game to satisfy your tax debt.
Fortunately, the IRS can be reasonable to work with if you are proactive with your communication and ask them to get on a payment plan or other agreement.
Payment Plans
IRS payment plans are structured like loans, but they are for your current tax balance. Two immediate payment plans are short-term (120 days or less) and long-term (more than 120 days). The payment plans each come with their own application fees, eligibility requirements, and repayment schedules. However, many consumers may be able to waive their prices based on their balance and income level.
Once the IRS approves your repayment plan, you can begin making payments until your balance is paid in full. Short-term repayment plans have a maximum balance of $100,000 worth of back taxes owed, while long-term goals have a $50,000 maximum. Most payment plans require the taxpayer to link a debit card, bank account, or credit card for automatic withdrawals.
Finally, it’s essential to understand that being on a payment plan with the IRS does not guarantee your balance or accrued interest will be forgiven – once your final payment is made, you will be caught up with your balance.
Currently Not Collectible
Sometimes tax situations can be a surprise and put people in financial distress. Suppose you find yourself in the position that paying your living expenses and tax bill simultaneously is a financial burden. In that case, you can request a currently not collectible status from the IRS.
When you apply for currently not collectible status, you may need to file a form with the IRS to prove your financial situation is as serious as you say. Like the IRS payment plans, acquiring currently not collectible status does not absolve your tax debt. It grants a temporary hold on your tax payments while you work to improve your financial situation. While you are currently not in a collectible status, the IRS may still place a lien on your assets, and they will check in annually to verify your financial situation.
Thankfully, there are many solutions and credits available to taxpayers to alleviate and mitigate their overall tax debt if they take advantage of it.
IRS Solutions
Each tax situation is unique, and the IRS offers preemptive tax relief solutions along with options for people who are behind on their taxes. The key aspect to controlling your tax bill is taking advantage of all credits and programs available to you, so you don’t leave money on the table.
The last thing you want is for the IRS to send you your entire tax bill without including any deductions, credits, or exemptions you qualify for.
- Tax Credits
After your deductions are accounted for, tax credits are taken out of your total tax bill. In essence, a tax credit is a direct discount on your overall tax owed. The government created these tax credits to incentivize specific spending that theoretically helps the entire economy.
For example, the Lifetime Learning Credit directly credits certain postsecondary education costs.
- Tax Deductions
Tax deductions reduce your taxable income, and as a result, your entire tax bill. There are many deductions, including the standard deduction, home mortgage interest deduction, and even deductions for business expenses. It’s vital that each taxpayer keeps their receipts and documents for potential deductions to save the most money on their taxes.
- Fresh Start and Offers in Compromise
The IRS’s least approved and most sought-after tax relief is an offer in compromise. Offers in compromise are difficult to achieve because the taxpayer makes an offer and settles their tax bill for less than they owe. Offers in compromise require proof of extreme financial hardship for the IRS to consider settling, and there are application fees involved.
Tax Relief Specialists
Tax relief companies are a third-party tax solution that can assist with IRS negotiations and identify potential savings you may have missed. The tax relief industry is plagued with scammers who prey on people in desperate financial situations, but reputable companies offer refunds and complimentary consultations.
If you owe back taxes to the IRS, and you don’t know where to start, then consulting a tax relief specialist may be a wise decision. Since reputable tax relief companies offer refunds and a free consultation, they will at least help you go in a forward direction.
Final Thoughts
Owing back taxes can be scary since you may feel like you don’t have a hold on your personal finances. By understanding how different tax relief strategies fit into your tax situation, you will be more prepared to talk with the IRS and get back on track.
If you want to learn more about tax relief and compare the most reputable companies, please check out our guides and reviews.
* This content is not provided by the financial institution or the offer’s provider. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and does not constitute a financial or expert advice.