Tax debt relief: Legit help or a real scam?
Image: Businessman sitting in his desk, wondering if tax relief could assist him.
In a Nutshell.
We think it’s important that you understand how we make money. It’s pretty straightforward, really. The offers for financial products that you see on our system come from companies who cover us. The money we make helps us give you access to free credit scores and reports also helps us produce our other fantastic tools and educational stuff.
Compensation might factor into how and at which goods appear on our stage (and in what sequence ). But since we normally make money when you find an offer you prefer and get, we attempt to show you offers we think are a fantastic match for you. That’s why we supply features like your Approval Opportunities and savings quotes.
Obviously, the offers on our system don’t represent all financial products on the market, but our goal is to show you as many fantastic choices as we can.
This article has been fact-checked by our editors and Christina Taylor, MBA, senior director of taxation surgeries for Credit Karma Tax. It has been updated for the 2019 tax year.
But if you end up owing also it’s more than you can afford, or you’re still supporting on previous years’ taxation, the stress and anxiety can feel crushing.
Some of these offers are outright scams. Others might just be an expensive way to do something that you can do on your own at no cost. Learn how to reduce the risk with all the knowledge and hints we’ve accumulated.
What is tax debt relief and why might you need it?
If you may ‘t afford to pay your taxes on time, you may qualify for some form of tax debt relief.
If you think you will need tax debt relief, act quickly to solve your issues. The IRS charges a failure-to-pay penalty of 0.5% of your unpaid taxes per month or portion of a month, plus interest. Interest begins accruing on the day your taxes are due (Tax Day, which is normally April 15), and proceeds until you pay your invoice in full.
So in the event that you spend $1,000 and you pay the balance six months , you’ll be struck by a failure-to-pay penalty of $30, plus the amount of curiosity which ‘s accrued. This doesn’t seem like a lot, but if you delay payment long , the penalty can be as much as 25% of your unpaid taxes.
A lien can lead to the IRS seizing the proceeds when you sell the property. Or it might put a tax levy on the home, in which case it can take the home and sell it to recoup the taxes that you owe the authorities. Affected property can include not just your home, if you own it, but also private property and financial resources.
Why you should be careful of tax relief companies.
You’ve likely seen or heard advertisements from tax relief companies offering to assist troubled citizens by reducing or even eliminating their tax debt. And technically, it is possible to settle your tax debt for less than the full amount you owe through the IRS offer in compromise, also known as an OIC.
Even though many of these companies charge nonrefundable fees — which can be tens of thousands of dollars — they might not have the ability to deliver on their promises. The standards are stringent — you are able to ‘t be in the center of a bankruptcy, must be current with all filing and payment requirements, and meet other qualifications. We’ll discuss about an offer in compromise shortly.
Some of these companies even venture into scam territory by taking tax debt balance your money and then failing to send the IRS that the necessary paperwork to apply for a payment plan or OIC.
The Federal Trade Commission has even received complaints that some tax relief companies have made unauthorized charges in addition to the upfront fees.
Some also offer to advocate on your behalf with the IRS for you on a payment plan. But in this event, you’ll likely overpay the business to do something which you can do all on your own by calling the IRS or your state directly.
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Scammers know that being in debt to the IRS can make people desperate and that they can capitalize on your own fear. Even though there might be legitimate tax-debt-relief companies, in addition, there are plenty of scammers.
The Federal Trade Commission says that a business demanding payment prior to doing something for you is a sign of a scam. Below are a few additional indicators to keep an eye out for.
Guaranteeing debt forgiveness Promising to drastically reduce or even eliminate your tax debt Pledging for penalties and interest waived Soliciting your business directly through letters or mails Failing to rate your financial history (that the IRS looks closely at your financial situation when considering an offer in compromise, any company which actually has the capacity to assist you should too) Using tactics that delay your case, such as repeatedly requesting the very same documents Informing you — once you’ve prepaid and waited a very long time — which you no longer qualify for debt relief or that the IRS refused your offer in compromise.
IRS tax-debt-relief choices.
If you’re struggling with paying the amount you owe in taxes, then the key is to react quickly.
"People freak out when they get a note from the authorities," says Julie Magee, director of taxation regulatory affairs at Credit Karma. "And folks tend to ignore or hide from the issue. But they all really need to do is speak to a government employee who can help them solve the issue. "
If you may ‘t cover your taxes, then your first step must be to get the IRS directly. In the event of federal taxation, the IRS has choices that might have the ability to assist you.
If you may ‘t pay your taxes in full today, you could have the ability to prepare a short- or long-term payment plan with the IRS. But be aware that any payment plan will come with penalties and interest on the unpaid balance until you make your final payment.
"As long as you don’t possess the resources available to pay off the debt, then there’s no income requirement [for the payment plans]," says Magee.
The short-term strategy gives you 120 days on which to make automatic payments to the tax you owe.
Should you need more than 120 days to cover, the long term payment strategy gives you a couple of options.
Contrary to the short-term payment plan, the long-term strategies cost money to set up.
Automatic strategy: $31 to apply on line, $107 to apply by telephone Nonautomatic plan: $149 to apply on line, $225 to apply by telephone.
Both plans offer a $43 installment fee for non profit applicants based on the federal poverty guidelines. If you opted to sign up online for the automated plan, it’s $31 regardless of income level. Plus qualifications for arranging a payment plan aren’t as strict as those to get an offer in compromise.
Check to see if you’re eligible to participate in an OIC using the offer in compromise pre-qualifier. The IRS determines your eligibility by Taking a Look at the following:
That said, the IRS indicates that you attempt the rest of the payment options prior to applying for an offer in compromise.
"Some countries have an offer in compromise program," says Magee, "so that it doesn’t harm citizens to ask their state if they have such a program when you’ve got a state debt in addition to federal debt. "
If you’re having difficulty paying your taxes, then think twice before soliciting help from a tax-debt-relief company. Best case? You could end up paying a lot for something you may do for less (or even for free) by working directly with the IRS. Worst case? You could end up getting scammed.
"Your very best solution would be to jump on that note you get and work it through with a government officer," says Magee.
You can also do it in person through a regional IRS office. Just be sure to make an appointment. And the earlier you get started working on a solution, the less you should have to pay in penalties and interest.
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COVID-19, taxation and tax relief.
The spread of COVID-19 has impacted nearly every aspect of our lives — even when it comes to taxes. Listed below are a few key things to learn about the impact of the coronavirus pandemic on taxation and government relief programs.
Tax deadline extended — The federal tax filing and payment deadline has been extended this year to July 15 because of the coronavirus. Furthermore, many nations — but not all — have embraced exactly the same deadline. But if you need money today and think you’ll be due a refund, then you should think about filing prior to the deadline. Should you don’t be eligible you can also use Credit Karma Tax, which is free for everybody. Filing a tax return to get a stimulus payment — If you had a federal tax refund directly deposited into your bank accounts for 2018 or 2019 and you are eligible for a rebate, you probably won’t have to do anything to get it. Obtaining a stimulus payment without filing a tax return — Should you weren’t needed to document for 2018 or 2019, wouldn’t have registered for any other motive, also didn’t get Social Security benefits in 2019, you don’t have to document simply to get your stimulus payment. The IRS has launched a free internet portal site for non-filers. You can provide information which will allow the IRS to determine your eligibility and payment amount and send a payment if you qualify for a single. For more answers on stimulus payments, visit this FAQ page from the IRS. This may be why.
Taxes and unemployment benefits — Should you’ve registered for unemployment and have received unemployment benefits, remember that those are usually subject to federal income taxation. If that sounds daunting, however, you can even choose to have your federal income taxation automatically withheld from the unemployment payment. Check out the Voluntary Withholding Request (Type W-4V) from the IRS for more info on how to do this.
Our editors are working diligently to help keep you informed regarding COVID-19’s impact on taxation, personal finance and much more. To locate the latest money news on the coronavirus, take a look at this page: Coronavirus along with your finances: We’ll help answer your queries.
And to find out about the latest tax relief advice coming from the IRS, take a look at this page: Coronavirus Tax Relief and Economic Impact Payments.
Christina Taylor is senior director of taxation surgeries for Credit Karma Tax. She has more than a dozen years of expertise in taxation, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six decades. She co-developed an internet DIY tax-preparation product, serving as chief operating officer for seven decades. She is the present treasurer of the National Association of Computerized Tax Processors and also holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.