“Tax resolution with the help of trained professionals can help individuals with serious tax debt,” says Jeff Staley, managing partner of Freedom Tax Relief, LLC. “The key is to take action. Don’t let overdue taxes languish. The IRS is serious – and increasingly aggressive – about tax collection and evasion. Tax debt can result in a lien on a house or garnished wages.”
As the April 15 tax filing deadline draws closer, a growing number of businesses advertising on television, radio and Internet claim to be able to reduce your tax bill — an enticing message for many Americans who are feeling the effects of the recession and may not be able to afford to pay their income taxes. But, is it possible to negotiate with the IRS and get a tax bill reduced?
Yes, says Staley. There’s a process known as tax resolution, through which the IRS may provide some settlement options. However, he says, “the process is more involved than those commercials may have you believe. It takes specialized expertise and knowledge of IRS systems.” For more information about income taxes, read Taxes Made Simple: Income Taxes Explained in 100 Pages or Less. And, here are tips for tax resolution…
Tax Resolution Tips – When You Can’t Afford to Pay Your Income Taxes
1. File an income tax return on time. Even if you can’t afford to pay your taxes, make sure you file an income tax return. Not filing is the single biggest mistake people can make in terms of staying in the good graces of the IRS. Filing late incurs penalties and interest, making a bad financial situation worse. The penalty for filing late is 5 percent of the tax due on a return – each month. Penalties max out at 25 percent for returns that are one year late. In addition, a taxpayer paying late will pay monthly interest at 0.5 percent of the unpaid amount each month. Interest also accrues on the balance owed. The bottom line: Filing a return one year late can result in penalties and interest that add as much as 38 percent to the tax owed on a tax return.
2. Get an extension on your income tax bill. If you can’t complete your tax return, file an extension (IRS Form 4868). You might still have financial penalties, but they’ll be less than if you simply don’t file.
3. Determine if you have “reasonable cause” for tax resolution. Taxpayers who can’t afford to pay their taxes should contact the IRS. “It may sound scary to contact the IRS, but if you avoid the situation, your financial problems will only get worse,” Staley says. “The IRS has many tools to find tax evaders and obtain money owed.” The agency’s policies may limit penalties for taxpayers who contact the IRS or pay a late bill voluntarily (for serious scofflaws, IRS policies offer reduced or no jail time if the taxpayer comes to them first). For those who can’t pay their income taxes because of a family crisis, serious illness, financial records lost in a natural disaster, or reason the IRS deems “reasonable cause,” the IRS may waive penalties after being contacted by the taxpayer.
4. Negotiate on your own with the IRS. Taxpayers with tax debts of less than $10,000 often can manage the payment on their own or via an installment plan arranged directly with the IRS.
5. Get help with tax resolution, perhaps from a debt settlement firm. When you can’t afford to pay your income taxes and have liabilities of $10,000 or more, specialists can negotiate directly with the IRS on your behalf, and help you with tax resolution. Tax relief specialists usually are attorneys, enrolled agents or certified public accountants with special training and experience. These experts can navigate the intricacies of IRS forms and calculations, help consumers understand the criteria the IRS imposes, and then help them get back into good standing with the IRS.
Depending on the severity of the financial situation, two types of IRS settlement are available:
- An offer in compromise reduces the principal, interest and penalties owed to the IRS.
- An installment agreement is a payment plan for the amount due and often includes reduced penalties.
Freedom Tax Relief provides consumer tax resolution services, helping financially distressed individuals resolve IRS problems.