Tax debt relief may not be the answer to all your tax problems. Learn the advantages and disadvantages of tax debt settlement.
In this article:
- Do You Qualify for Tax Relief Services?
- How Does IRS Tax Help for Back Taxes Work?
- Is Tax Debt Relief Right for You?
- Disadvantages of Tax Debt Relief
The Good and Bad of Tax Debt Relief Programs
Do You Qualify for Tax Relief Services?
— Chris Rivera (@drippychris203) October 10, 2017
One can never stress enough the benefits of tax debt relief. Very few things strike fear into the heart of man more than facing a mountain of IRS tax debt they are unable to pay.
Many people feel like they are swimming in a sea of debt related to their taxes. For these people, the idea of tax debt relief in the form of the IRS debt forgiveness program sounds like a lifeline.
Before you grab it and hold on for your dear life, though, it’s a good idea to ask the question: “Is tax debt relief right for you?”
While often referred to as IRS tax relief, the official name of the program is “offer in compromise.” It is a settlement reached between individual taxpayers and the IRS, allowing them to settle by paying less than the full tax liability owed.
Not everyone qualifies for debt relief services in this form. In fact, the IRS rejects many.
If the IRS rejects you, there is an appeal process. But it’s best to learn upfront if you even qualify for assistance or relief from your unpaid taxes.
You can get a good idea of whether you qualify for help with federal taxes owed. You can do one of two things:
- Fill out the offer in compromise pre-qualifier assessment with the IRS.
- Work with a tax debt relief company.
How Does IRS Tax Help for Back Taxes Work?
When you qualify for the OIC program with the IRS, you qualify for a reduction in your tax burden. You may pay the new total in a lump-sum payment or in installment payments.
The details vary according to your income, your total tax debt, and the solution you choose. The process can be confusing when doing it alone. However, working with a tax debt relief agency can aid you in finding true IRS tax relief.
Is Tax Debt Relief Right for You?
It’s important to decide if this might be a good choice for you before you begin the process of attempting to receive tax help in the form of an IRS offer in compromise. These are a few of the benefits you might enjoy by choosing to seek help with IRS taxes owed.
1. Avoid Wage Garnishments
The government can opt to garnish your wages if you continue to ignore your tax obligations. This isn’t the case if you are actively participating in their tax debt forgiveness program.
Then, they cannot put you through the financial hardship and personal embarrassment of garnishments.
2. Reduce Your Tax Burden
Perhaps the biggest benefit is you will ultimately pay less than you owe the government if you qualify. This makes your debt more manageable and helps you pay it off faster.
3. Remove Liens on Your Property
If you owe the IRS money and aren’t taking care of business, the IRS can attach liens to your home, vehicles, etc. They can take possession of your properties until you pay off your debt.
It sounds like a great deal for the people who qualify. Don’t rush just yet, though.
There are some negatives to consider as well.
Disadvantages of Tax Debt Relief
The major disadvantage of turning to the IRS for assistance in the form of tax debt forgiveness is it gives the IRS an opportunity to thoroughly explore your finances – past and present. But there are other potential drawbacks to consider as well.
- It’s a time-consuming process that may take years to resolve.
- If you do not meet the terms of your agreement, you have the responsibility for the original debt plus potential penalties and interest.
- Very few people actually qualify for the program despite feeling confident going in that they do.
- The options can be confusing and tricky.
Let’s further explore these issues with IRS tax debt relief.
1. Length of Time of a Tax Debt Relief Program
In case a person finds themselves dealing with all sorts of tax issues and they wish to take advantage of a payment plan from the Internal Revenue Service, then they have to be patient. It can take weeks before they know if they qualify.
Then, the installment agreement can take as long as six years or more, depending on the value of the forgiven debt. If they fail to settle your monthly payments, they can lose such privilege and the remaining debt can become demandable immediately.
Meanwhile, the IRS can attach a federal tax lien even before your debt reaches $10,000. It means you may need to enter into an IRS tax debt relief program as soon as you can if you cannot afford to pay it.
2. Nothing Erases Your Responsibility for the Debt
A lot of people make the crucial mistake of being too confident with tax debt relief. They believe they can qualify, but the IRS can be very choosy with the people they accept.
During the waiting period, there’s a possibility the tax obligation only continues to increase.
Even if the person qualifies, the supposed canceled debt doesn’t diminish the person’s accountability for it. They still need to settle the tax liability in their tax returns at some point.
Also, if they owe their state some tax payment, then they may need to consider state tax debt relief as well.
For those who don’t qualify, they can appeal to the IRS with the help of tax debt relief companies, tax attorneys, and enrolled agents. Still, the IRS has the final say.
3. The Qualifications Are Murky
How does the IRS determine who they should forgive? It depends on a number of factors.
Based on the pre-assessment tool, it may be essential the person isn’t going through any bankruptcy proceeding and that they filed their income tax return on time.
They may even need to start making their estimated tax payments, which is an indication programs such as Fresh Start don’t resolve all the debts.
One must remember, though, the pre-assessment tool doesn’t offer guarantees. In the end, the IRS can consider other factors the applicant will never really know.
What happens if the person doesn’t qualify? The stakes are higher.
Consider the non-payment of payroll taxes. To avoid imprisonment for as long as five years, they need to pay a fine of up to $500,000, a Trust Fund penalty, plus the unpaid tax.
4. The IRS Tax Laws Are Complicated
Most people will agree IRS tax laws, even for tax debt relief, can be confusing. That’s why it can be beneficial to work with an experienced tax professional.
The big problem is they may even trigger a higher liability. Take, for example, student loan debt and credit card debt forgiveness.
The creditors might have their own debt relief programs, so the person may avoid wage garnishment, freezing of bank account, and other issues if they qualify. The IRS, though, says these benefits can still be taxable income.
The IRS compels creditors or debt collectors to file Form 1099-C if they allow their debtors to pay less than the amount they owed. The debtor, meanwhile, then has to settle this additional income with the tax agency.
When it comes to student loan debt, this may not become taxable if the agreement says the person has to render a certain period of work or they either died or became incapacitated or disabled.
No one enjoys owing the IRS. Sometimes the size of the debt feels as though it’s insurmountable.
Tax debt relief programs do exist to help some qualifying taxpayers find relief from a portion of what they owe to the IRS. Make sure you have a team in place that’s on your side to help you navigate the tricky application process.
This improves your odds of acceptance, so you can experience that relief for yourself. Nevertheless, choose a debt settlement company well. Read tax debt relief company reviews, for example.
Remember, they need to champion your cause that may save you from financial ruin.
What do you think about the pros and cons of tax debt relief? Share your thoughts in the comments section below!
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
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Editor’s Note: This post was originally published on March 1, 2018, and has been updated for quality and relevancy.