Many people have experienced financial hardship and have been unable to pay their taxes due to unemployment or reduced work hours during the pandemic, but getting tax relief is possible. This article will discuss whether it makes sense for you to hire someone to help you get tax relief, the kinds of programs the IRS offers to help taxpayers with back taxes, and how bankruptcy plays into tax debt. Read on to see how you may be able to get the tax relief you deserve.
Written by Attorney Tori Bramble.
Updated January 11, 2022
The COVID-19 pandemic has affected many people’s income and ability to pay taxes. But, if you get behind on paying your taxes and don't act fast, your tax situation can quickly get out of hand.
If you saw a reduction in take-home pay because of the pandemic, this may actually work in your favor when it comes to tax relief. That’s because the Internal Revenue Service (IRS) takes your net income and tax filings into account when determining what you can afford to pay toward your back taxes and whether you qualify for tax relief. Net income includes take-home pay from a job or money earned from self-employment. The IRS doesn't consider your gross income, which is the amount you earn before taxes are taken out.
This article will discuss whether or not to hire someone to help you get tax relief, the kinds of programs the IRS offers to help taxpayers with back taxes, and how bankruptcy plays into tax debt. Read on to see how you may be able to get the tax relief you deserve.
Should You Deal With The IRS On Your Own Or Should You Hire Someone To Do It For You?
Dealing with the IRS (or any taxing authority) is complicated, time-consuming, and difficult. You’ll have to gather documents, discuss your account with an IRS agent, and sort through your options to decide what’s best for you. You'll have to decide if you want to deal with the IRS on your own or hire someone to deal with the IRS for you. If you're overwhelmed and believe you can't handle dealing with the IRS on your own, you may want to seek the help of a tax professional. Note that there are pitfalls you’ll want to avoid on your journey to tax relief.
Many Tax Relief Companies Are Scams
If you have unpaid federal tax debt and are looking for help to resolve it, be careful to avoid scams. There are many scammers out there just waiting to take your money without getting you the tax debt relief you deserve.
You've probably heard a commercial spokesperson on your television say, "Settle your tax debt for pennies on the dollar." This sounds tempting if you need a solution to your tax problems. And while there are tax relief companies that can help you settle back taxes, many of these companies are scams. These scam tax relief companies charge you money promising that they'll help you out with your overdue tax payments, but they often end up making a bad tax situation worse.
These companies may require an upfront fee, sometimes $3,000 or more, and they often also charge monthly fees of hundreds of dollars. But once you pay the money to get help, some companies break their promise to resolve your tax debt with the IRS.
Unfortunately, many of these companies don't actually help consumers and some people lose thousands of dollars by hiring them and still owe the same amount or more to the IRS.
What To Look For In A Representative
If you do hire a tax expert to help you with your tax problems, make sure they are an IRS enrolled agent, a Certified Public Accountant (CPA), or an attorney with tax experience.
An enrolled agent is a tax professional authorized by the IRS to represent taxpayers in IRS matters. An enrolled agent can file your tax returns, and they can negotiate with the IRS to settle your outstanding tax debt. An enrolled agent has much more knowledge than a typical tax preparer because they've passed a difficult test to become one.
A CPA has passed an accounting exam. CPAs do bookkeeping and financial planning and can prepare tax returns along with other important documents.
Finally, a tax attorney has experience handling and resolving tax debt matters with the IRS. Tax attorneys are good sources of information and professional advice. You'll want to check reviews and interview attorneys before you decide which one can best help you deal with your tax situation.
Signs That A Tax Relief Company Is Legitimate
Before you work with any tax relief company or individual, be sure to do your homework. There are many sources you can use to check out a company or person's reputation. First, check with your local Better Business Bureau (BBB) and the state attorney general's office where you live. Ask if anyone has filed a complaint against the tax relief company or person you want to hire. If the tax relief company or individual has had many complaints and doesn't get the green light from the BBB or your state's attorney general office, they may be running a scam.
You should also make sure that the company you're considering offers a free consultation, has a good refund policy, and is available to meet face-to-face to talk. If you're dissatisfied with their services because they've failed to help you with your delinquent taxes, they should offer you a refund.
If you're out of work and stuck at home during the pandemic, you likely have more time to deal with the IRS yourself instead of hiring an expensive tax relief company. Before you contact the IRS about solutions for your outstanding taxes, the first thing you’ll need to do is get caught up on all your tax returns. You can use your extra time to work on your tax situation and save money.
If your tax situation is not complicated, don't be afraid to tackle your tax debt on your own. You’ll need to be patient and organized, but you can get relief from the IRS. While you're home during the pandemic, call the IRS, find out how much tax you owe, and get on a manageable payment plan.
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IRS Relief Programs
If you're experiencing financial hardship, IRS programs can help you get a fresh start and settle your tax debt. Here we'll learn about installment agreements, offers in compromise, partial payment agreements, and currently not collectible status as ways to get your tax bill settled in 2021.
Installment Agreements: These are payment plans that let you pay your back taxes in full to the IRS over time. If you owe less than $50,000 you can ask the IRS to put you on a short-term or long-term payment plan. Qualifying taxpayers can get the time they need to pay off their tax debt. You can find out more about IRS installment agreements for tax repayment by visiting the agency online or calling it directly.
Offer in Compromise (OIC): An OIC is an agreement with the IRS to pay less than the full amount of money you owe. An OIC is not easy to get. The application requires a lot of documentation of income and time. You'll have to prove to the IRS that you can't pay the full amount of your tax debt and make a down payment as a good-faith way to show the IRS that you're serious about paying off your taxes.
Also, with an offer in compromise, you can make an offer to pay the IRS a lump sum or ask for up to a 24-month payment plan. The length of your payment plan will be based on whether you have the money to pay the IRS right away or if you need time.
Partial Payment Installment Agreement (PPIA): These are regular installment agreements of up to 72 months or until the CSED (Collection Statute Expiration Date), whichever period is shorter. Like an OIC, if a PPIA is accepted by the IRS, you'll pay less than the full amount for the tax year or years that you're behind. But unlike an offer in compromise, with a PPIA the IRS will review your financial situation every two years by asking for financial documents like pay stubs and bank statements. During the review, if the IRS finds that your income has increased, it can ask for a higher monthly payment.
The IRS uses Form 433-A to decide how much you can afford to pay on a payment plan. For example, let's say you have a 2019 tax liability. The IRS will look at the 2019 calculation showing the amount you earned from your job and come up with an amount they believe you can afford to pay in an OIC or PPIA. As another example, if you were unemployed for some or part of 2020 or 2021, the IRS can use any income you've earned, including unemployment benefits you've received, to determine what you can afford to pay.
Currently Not Collectible (CNC) status: You may be able to get temporary tax debt relief in the form of Currently Not Collectible (CNC) status. This is not a long-term solution and it won’t get you out of tax debt. It will, however, keep the IRS from pursuing your debt while you manage a financial hardship.
You can only use CNC if you can't get an OIC or PPIA and are unable to afford an installment agreement. Keep in mind that your penalties and interest will continue to accrue on your tax balance and this can add up fast. Once your financial condition improves, you'll lose CNC status and should then consider applying for another form of tax relief.
Bankruptcy is a debt relief solution that many Americans choose when they want to get a fresh start. If you can't get a reasonable payment plan from the IRS or get an offer in compromise approved, filing for bankruptcy may be an option. If you can't keep up with a payment plan and have other debts you can't pay along with your tax debt, you should look into bankruptcy.
Keep in mind that bankruptcy hurts your credit score temporarily. But bankruptcy gets you relief from your debts by either eliminating them (Chapter 7) or restructuring them into a payment plan for five years or less (Chapter 10). While filing for bankruptcy should generally be your last resort, sometimes it can be a necessary and helpful tool to manage or get out of debt.
Chapter 7 Bankruptcy
This is generally the fastest way to get out of crushing tax and other debt, but you have to qualify to file. You likely can't file if you’ve had a Chapter 7 discharge within the last eight years.
You also likely can't file this form of bankruptcy if you have enough income to pay your debts. This means you'll have to pass the Chapter 7 bankruptcy "means test." This test determines eligibility by looking at your income and comparing it to the median income in your state. If your income is lower than the median income, you’ll pass the test. This formula was designed by Congress to prevent what it considers high-earning people from filing for Chapter 7 bankruptcy.
If your taxes are unmanageable because you were out of work last year or have been otherwise financially harmed by the coronavirus pandemic, it's more likely you'll pass these tests allowing you to file a Chapter 7.
Chapter 7 will eliminate your tax debts only if the following two conditions are met:
First, your tax debt must pass the 3/2/240 requirement. To get income taxes eliminated in bankruptcy, they have to meet three rule requirements:
Rule 1: The taxes must have been due more than three years before you file bankruptcy.
Rule 2: You must have filed your income tax return at least two years before filing bankruptcy.
Rule 3: Your taxes must have been assessed by the IRS at least 240 days before the day you file bankruptcy.
Every one of these rules has to be met to get tax debt relief. For example, if you owe taxes for one of the last three years (including extensions), then this debt can’t be discharged in bankruptcy. You'd still have to pay these taxes to the IRS after filing a Chapter 7 bankruptcy case. Similarly, if you file bankruptcy under Chapter 13, you will also generally be required to pay all of your the taxes back in a repayment plan.
Second, there can’t be a federal tax lien in your name. If the IRS filed a valid tax lien in your name before you file for bankruptcy, it will remain in place. The bankruptcy court can't throw out a tax lien if it was filed properly before you filed a Chapter 7 case.
Chapter 13 Bankruptcy
If you're unable to pass the Chapter 7 means test, you may be eligible to file a Chapter 13 bankruptcy.
With Chapter 13, you may be able to eliminate your tax debts for pennies on the dollar if your tax debt passes the 3/2/240 rule. If your tax debt doesn't pass the 3/2/240 rule or you don’t have a tax lien, you can pay your taxes in full through a Chapter 13 repayment plan in five years or less. If there’s a tax lien on your property, filing a Chapter 13 bankruptcy case may help you get rid of it.
A great benefit to Chapter 13 is that from the date you file your case, the IRS must stop adding penalties and interest to your past-due taxes. And once a Chapter 13 plan is complete, all tax debt included in the plan is eliminated.
Many people have experienced financial hardship and have been unable to pay their taxes due to unemployment or reduced work hours during the pandemic. Getting tax relief is possible. You can choose to work directly with the IRS or hire a tax professional. In some cases, you may want to consider filing bankruptcy to deal with your taxes and other debts like credit card debt. Bankruptcy can be hard to navigate. It's important to contact a qualified bankruptcy attorney in your state to learn about your tax relief options.