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Types of Tax Relief for Individuals

Mayra ParisFeb 13, 2018

In general, the term "tax relief" refers to a measure—such as a credit, deduction, or incentive—that eases the tax burden placed on an individual or a business. However, it is often also applied to ways of reducing or even eliminating the debt owed in back taxes to the IRS or a state tax agency. This is done by making the tax agency reconsider collecting the taxpayer's debt in light of a special circumstance, like economic hardship or other reasons. Tax relief methods vary from individuals to businesses. Below, we will go over the most common ways individuals can relieve their tax debt.

Installment Agreement

This is usually the first option to explore if you owe a large amount in back tax and can't pay it all at once. An Installment Agreement with the IRS will let you make smaller payments towards the debt over a period of time that can be as short as 120 days and as long as six years. There are several types of installment agreements, and which one is right for you will depend on your particular situation.

For a taxpayer who owes less than $10,000 and can settle the debt within three years, a Guaranteed Installment Agreement would be ideal. If you owe more than that, up to $50,000, the IRS will extend the payment period to six years under a Streamlined Installment Agreement. Other types are available for businesses and individuals who don't meet these requirements.

Keep in mind that some fees apply when you set up an installment agreement. Also, signing an installment agreement may extend the collection deadline on your debt—IRS debts may be wiped clean after ten years from the date of the tax assessment, but a taxpayer can voluntarily waive the limitations period.

Offer in Compromise (OIC)

If an installment agreement is not an option for you—for example, because you know you will not meet the payment deadline or because you will not be able to pay the entire amount owed without causing yourself a significant hardship—you should consider an Offer in Compromise. Like the name indicates, you will offer the IRS a smaller amount of money as a compromise to settle the full debt. Once the OIC payment or payments are made, the debt is eliminated

To be eligible, you must not currently be in a bankruptcy proceeding, you must have filed all your tax returns, and you must have made all required estimated tax payments. Once the offer is accepted, any tax refunds owed to you will be applied towards the debt, and any existing liens on your assets will remain until the offer agreement is fulfilled.

There is an application fee involved, and you may be required to submit some payments with your offer. Additionally, the timeframe for processing an offer in compromise is lengthy, so keep track of all the deadlines.

Currently Not Collectible (CNC) Status

A Currently Not Collectible status postpones collection on a tax debt. This is a good idea when a financial hardship does not allow you to pay taxes owed. Once the CNC status is placed on your account, the IRS ceases collection attempts, meaning they will stop sending you frequent bills (save for an annual bill required by law) and they will not place levies on your assets. The IRS will assess your account periodically to see if your financial situation changes in the future.

While a CNC status may sound pretty tempting, there is a catch: your debt will continue accruing interest and the IRS may continue to apply late payment penalties to the bill. You must also continue filing your tax returns as usual, even if you can't pay, to avoid penalties for late filings. Also, as is the case with Offers in Compromise, the IRS may retain your future tax refunds to pay off the debt. And they may still place a Notice of Federal Tax Lien on your account—there is more information on tax liens below.

Because of all these reasons, a Currently Not Collectible status request should be your last resort, once you have explored all other payment options, because your debt may grow exponentially, effectively digging you deeper into a hole.

Penalty Abatement

If the IRS places a penalty on your account because of a failure to file, a failure to pay, or a failure to deposit (in the case of businesses that do not make payroll deposits on time), you may be able to apply for a penalty abatement, so long as this is the first time a penalty has been assessed for a specific tax return. If the penalty has racked up due to a financial hardship, you may be able to cut hundreds or thousands of dollars from your tax bill. To qualify, you must have had a clear penalty record for the past three tax years.

Removing Tax Liens

A federal tax lien is, according to the IRS, "[a] legal claim against all your current and future property." That means that, if you owe back taxes and you sell your house, the US government has the right to demand money from the proceeds of the sale to satisfy your debt. A federal tax lien is filed automatically if you fail to pay your taxes. A Notice of Federal Tax Lien (NFTL) is merely the public notice that is placed on your account letting creditors know that the federal government has this claim. This notice could affect your ability to get credit from banks or other institutions. An NFTL is filed automatically if you owe more than $10,000.

The only way to fully remove a tax lien is by paying the debt in full. However, there are ways of relieving their effect. One of them is through a discharge of property, which removes the lien from a particular piece of property. This would come in handy, for example, if the house you want to sell has such little value that the IRS will not be able to satisfy your debt if it seized the assets.

Another option is subordination, which doesn't remove the lien itself, but it allows other creditors to jump in line ahead of the IRS. A certificate of subordination could allow you to get credit more easily, since the creditor would be more likely to recover their investment if you default.

Finally, a withdrawal allows you to remove the public NFTL, which may be blocking you from getting credit and affecting your credit score. If you are participating in an installment agreement, you may be able to withdraw the NFTL if you convert it into a Direct Debit installment agreement, which means the installment amounts will be debited automatically from your bank account, further ensuring payment. Once your debt is paid off and the federal tax lien is release, you may also request the removal of your public NFTL.

Releasing Tax Levies

A tax levy happens when the IRS seizes your property to pay your tax debt. For example, if your vacation home is levied, it may be sold to satisfy the debt. If the levy is placed on your bank account or on your wages (also called a wage garnishment), the money will be used to pay off the debt.

A levy can be removed for several reasons. If the levy is keeping you from meeting the terms of your installment agreement, for example, or if the levy causes you considerable financial hardship, to the point where you can't meet your basic needs, the IRS is required to release it. The federal government wants you to pay your taxes, but not at the expense of your health or security. However, note that a levy release does not mean you do not have to pay the debt. You are still responsible for paying your back taxes, and the IRS may impose other measures to make sure you fulfill this obligation.

Innocent Spouse Relief

When spouses file joint tax returns, they are both responsible for the taxes that must be paid (what is called "jointly and severally liable"). This responsibility continues even if one spouse earned most or all of the income, or even if you separate or divorce. Nevertheless, there are cases when a spouse can relieve themselves from the tax liability.

Innocent Spouse Relief releases you from responsibility for additional taxes owed if your spouse or former spouse failed to file the tax return correctly. This could be if they didn't report all the income they had earned or if they reported it incorrectly, or if they claimed deductions or credits they didn't truly qualify for. To be able to receive this form of relief, you can't have known about the mistake at the time the tax return was filed.

There is also a Separation of Liability Relief, which effectively separates your tax responsibility from your spouse's if you are divorced or legally separated, or if your spouse is dead. Equitable Relief is another form of spousal tax relief, which may apply if the other two forms of relief are not available to you. The IRS will determine if holding you responsible would be unfair, and they will take into consideration any abuse or financial control exerted over you by your spouse.

Getting Tax Relief

Contrary to popular belief, taxpayers can file tax relief documents themselves. The IRS and many state tax agencies provide the necessary forms on their websites. However, it may be time consuming for an inexperienced person, and someone who has worked on tax relief cases before will need to do less research to complete the entire process. Find out if hiring a tax relief agency is right for you, and if you're ready to find an agent, check out our Tax Relief Top 10.