Tax Relief Programs: 5 Options To Help You With Your Tax Debt

Tax relief programs are policies and programs established by the government to help lessen an individual’s tax bill.

If you’re currently facing a dilemma involving your tax dues, there are different ways that tax relief programs can be instrumental in managing the amount that you owe to the federal, state, and local government.

For instance, you can get a tax deduction, qualify for a tax credit, or even be granted relief from your tax debt. If you need more guidance, we’ll tackle the different types of tax relief programs, including alternative methods to effectively manage your tax debt in this article.

Key Takeaways

• Tax relief programs are government initiatives and policies designed to help taxpayers settle or reduce the amount of taxes they owe.
• The five most common and specific types of tax debt relief initiatives include IRS payment plans, Offer in Compromise, penalty abatement, and acquiring a Currently Not Collectible Status.
• Meanwhile, some practical alternatives to tax relief programs include filing for bankruptcy, innocent spouse relief, and applying for a credit card loan to pay existing tax debt.

What Are Tax Relief Programs?

Tax relief programs, also called tax breaks, tax benefits, or tax exemptions, are a range of government initiatives designed to assist taxpayers who are experiencing difficulties in paying or resolving their existing tax liabilities.

The people who usually apply for tax relief include, but are not limited to, the following:

• Workers who recently got displaced from their jobs
• Taxpayers in the middle of repaying multiple debts
• Single parents
• Senior citizens
• Business owners who experienced a significant loss in profit
• Families, businesses, or organizations that lost their source of income following a recent calamity or disaster

Some of these initiatives and policies are the result of calamities, emergencies, and natural disasters that paralyze a taxpayer’s capability to fulfill their tax obligations.

A good example of this is the Coronavirus Tax Relief, which was meant to help families, businesses, and individuals affected by the COVID-19 pandemic. Similarly, the Tax Counseling for the Elderly (TCE) program assists senior citizens in filing their returns.

Types of Tax Relief Programs

Here is a quick overview of the main types of tax relief programs used by taxpayers:

• Tax credit. Tax credits help reduce the taxes owed by an individual or a business owner on a dollar-for-dollar basis. Examples of tax credits include the Child Tax Credit and Earned Income Tax Credit.

• Tax debt relief. A tax debt relief (or a tax debt forgiveness program) is a short or long-term payment plan offered by the IRS to help an individual settle their outstanding tax balances.

• Tax deductions. Tax deductions reduce the amount of income that’s subject to federal and state taxation. Mortgage interest and home office deductions are some of the most commonly used ones.

5 Common Tax Relief Programs and Options

With the variety of tax relief programs and options available, it can be overwhelming to find one that suits your exact tax situation. Fortunately, there are some of the most common tax reliefs that taxpayers can start with to narrow down their choices.

It is also worth noting that most of these tax reliefs are offered by the Internal Revenue Service. Let’s learn more about them:

#1. IRS Payment Plans

The IRS payment plans are agreements between the IRS and taxpayers who are struggling to pay their taxes.

The eligibility criteria for an IRS payment plan are as follows:

• Short-term payment plan. Taxpayers who owe $100,000 or less in combined unpaid taxes, interest, and penalties may qualify for a 120-day extension to pay their balances.

• Long-term payment plan. If a taxpayer owes the IRS $50,000 or less, they may be given more than 120 days to settle their tax dues and penalties.

Applying for an IRS payment plan can be done online, provided that taxpayers have already registered for or created an online IRS account. By creating an account on the IRS website, they can acquire an identity protection PIN (IP PIN) or a tax transcript.

If a taxpayer does not yet have an online IRS account, they must create an ID.me account and verify their identity using any of the following:

• Valid email address
• Social Security Number (SSN)
• Individual Tax ID Number
• State ID, driver’s license, passport, or any other valid identification bearing their photo

On the other hand, those who cannot apply online may do so instead by contacting the IRS at 800-829-1040 or 800-829-4933 or filing Form 9465.

#2. Offer in Compromise (OIC)

Unlike the IRS payment plans, an Offer in Compromise (OIC) allows qualified taxpayers to pay less than their total overdue or unpaid tax balances. An OIC is often granted to individuals and businesses undergoing financial difficulties that prevent them from settling their tax dues.

To qualify for an OIC, a taxpayer must meet the following conditions:

• The taxpayer has already made all mandatory estimated tax payments and filed their tax returns.

• If they are applying for an OIC for the current year, they must have a valid extension for the current year’s tax return.

• For employers, they must have already deposited tax payments for the current year and the last two quarters.

• Taxpayers must not be in an open or ongoing bankruptcy proceeding at the time of their application.

The Internal Revenue Service will also gauge an individual’s capacity to pay their taxes by looking into the taxpayer’s current income and comparing it with their expenses and asset equity.

#3. Currently Not Collectible Status (CNC)

The Currently Not Collectible (CNC) Status is a tax relief program for individuals facing financial difficulties, and it defers their tax dues until such time that their situation improves.

For taxpayers to qualify for a CNC status, they must first be able to provide sufficient proof of income, such as bank statements, copies of their latest pay stubs, W-2 forms, or 1099 forms.

In response, the IRS will investigate a taxpayer’s finances, savings and bank accounts, and other sources of income.

They do so to ensure that the taxpayer does not have any other assets or backup financial wealth that they can use to pay off their tax debt.

#4. Penalty Abatement

Penalty abatement is a one-time tax relief program for Failure-to-File, Failure-to-Pay, and Failure-to-Deposit penalties.

The IRS reserves penalty abatement for taxpayers who have successfully filed their tax returns for the past three years without incurring any penalties.

Qualified individuals may request a first-time abatement by phone, by mailing a letter to the IRS, or by fulfilling Form 843, Claim for Refund and Request for Abatement.

It is important to note that taxpayers may still qualify for a tax penalty abatement even if they have not paid off their tax balances in full.

However, just like in a tax extension, the IRS may grant you an extended time to pay your balance, but the interest in your penalties will continue to increase until you settle your dues.

#5. Tax Relief Company

A tax relief company can assist you in reducing and managing your tax debt. While it may seem enticing to get a lending hand from an agency or organization to pay off one’s tax balances, it also comes with certain risks.

That said, scrutinizing the services and reliability of a tax relief company is crucial. Some key factors to take note of in choosing a tax relief company include:

• Upfront fees and offers. A good number of tax relief companies usually charge flat upfront fees. Taxpayers must also compare and contrast each company’s offers and services to find one that suits their specific tax dilemma.

• Requirements. The requirements can vary per tax relief company. For instance, Fortress Tax Relief requires a minimum tax debt amount of $10,000, while Tax Defense Network requires $5,000. Some companies have zero tax debt requirements.

• Accreditations. Accreditations from reputable organizations such as the Internal Revenue Service, the National Association of Tax Professionals (NATP), and the National Association of Enrolled Agents (NAEA) imply that the tax relief company is trustworthy and reputable.

3 Alternatives to Tax-Debt Relief

There are alternatives to tax debt forgiveness programs that can help businesses and individuals manage their tax balances.

At times, tax relief programs may not be the ideal choice for some taxpayers, particularly if they fail to meet the qualifications set by the IRS or their tax relief company of choice.

So, what are these three tax relief program alternatives?

#1. Credit Card Loan

Paying taxes using one’s credit card is possible. The key is to use third-party credit card and debit card payment processors approved by the IRS, such as PayUSAtax, ACI Payments, Inc., and Pay1040.

While paying tax debt by applying for a credit card loan entails a processing fee, taxpayers can also take advantage of applicable credit card rewards and special financing, depending on their credit card service provider.

#2. Filing for Bankruptcy

Filing for bankruptcy can potentially help relieve taxpayers of their remaining tax debt. However, taxpayers must use this option with caution because bankruptcy can affect their credit score long-term.

According to the United States Courts, filing pro se or filing bankruptcy without an attorney is risky because taxpayers don’t know the full scope of how a bankruptcy petition is processed.

They may also risk losing their assets and even face legal consequences if the court determines that an individual or organization does not qualify for bankruptcy.

#3. Innocent Spouse Relief

The innocent spouse relief frees a spouse from shouldering their partner’s tax debt. Often, spouses who are married filing jointly as opposed to those filing separately apply for innocent spouse relief because their partner understated their tax dues on their joint returns.

Additionally, the IRS requires that the spouse file joint returns with their partner to qualify.

Meanwhile, if the filing spouse qualified for Offers in Compromise, they may not qualify for innocent spouse relief.

3 Long-Term Tax Relief Strategies

Aside from exploring the different tax relief programs and alternative options for managing one’s tax balances, employing long-term strategies to regulate overdue or unpaid taxes encourages a more proactive approach to fulfilling one’s tax obligations more efficiently.

Tax relief strategies are effective at assessing one’s income and budget and projecting a more specific timeline to settle any outstanding interests, penalties, and tax dues. Here are some noteworthy strategies for business owners and individual taxpayers:

#1. Retirement Account Utilization

Retirement account utilization entails withdrawing one’s 401k, 403(b), or IRA contributions to serve as funding for paying taxes.

The amount that a taxpayer can withdraw and utilize to relieve them of existing tax debt depends on their payment plan and retirement account of choice.

It is crucial for taxpayers to accurately estimate their tax liabilities and ensure they can adjust the amount they plan to withdraw accordingly.

#2. 1031 Exchange

A 1031 exchange is a tax break that defers capital gains tax by exchanging one real estate property used for investment or business purposes for another similar estate.

The IRS must agree that the properties that were purchased and sold in a 1031 exchange are of the same type to grant an investor’s request to defer their capital gains tax.

#3. Proactive Tax Planning

Proactive tax planning entails a series of steps that ultimately lead to ensuring timely tax payments and the submission of one’s tax returns. An effective proactive tax planning strategy typically requires the following course of action:

• Knowing one’s tax bracket and average monthly income. This helps make more accurate estimations of one’s quarterly and annual tax dues.

• Updating W-4 and W-9 forms. Whether a taxpayer needs to change their filing status or employment details, their Form W-4 or Form W-9 should reflect the said updates to ensure the correct tax amounts are withheld from their income.

• Distinguishing the purpose of each IRS form. Understanding when to use a 1099 form vs. a W-2 form reduces unnecessary tax filing errors that could lead to penalties.

• Reducing taxable income. There are different ways for business owners or regular taxpayers to reduce their taxable income, and exploring their options to do so is a good way to manage their budget and increase their take-home pay.

How to Recognize Tax Debt Relief Scams

Tax debt relief scams often charge unsuspecting taxpayers hefty fees upfront and have an impossible list of requirements that interested applicants hardly ever meet.

Often, reliable tax relief companies offer cost-effective rates and a minimum tax debt amount. Otherwise, if the company promises to resolve tax liabilities in asuspiciously short time, it is most likely a tax relief fraud.

Aside from offering tax relief program scams, some fraudsters also pretend to be agents or representatives of the IRS. They contact taxpayers by phone and attempt to fool them into thinking their tax debts can be relieved for a fee.

In reality, the Internal Revenue Service never contacts taxpayers via phone or email. All of their notices are sent via mail. Another surefire way to identify a tax debt relief scam is if the fraudster fails to properly assess a taxpayer’s financial background and penalties.

Identifying a tax relief scam is crucial to avoid falling into an even deeper debt trap and facing possible legal action for engaging in fraudulent tax activities.

Final Thoughts

Tax relief programs provide a solid resolution for taxpayers who can’t pay their taxes due to financial constraints, disabilities, calamities, and other unforeseen life events.

With the availability of tax relief assistance offered by the IRS and accredited tax relief experts, taking the time to learn more about each of these programs and policies enables taxpayers to strategize how to pay their tax balances more efficiently.

Furthermore, staying updated with the latest updates from the IRS or policy changes in their state’s tax regulations keeps businesses and individuals fully aware of the scope of their rights and obligations as taxpayers.