Owing money to the IRS can be a financial and mental burden, but luckily there are options for tax relief
The best things in life are free, but being in debt can ruin more than just your credit score, it can affect your mental health as well. Some research has found that worrying about debt causes stress which can increase your risk for mental health issues.
The Average American Debt
Those finding themselves in debt are certainly not alone. According to the Federal Reserve’s latest numbers, the average American carries $137,063 in debt.
In 2017, this debt was seen as an average of
- $16,883 in credit card debt
- $29,539 in auto loans
- $50,626 in student loans
- $182,421 in mortgages.
The increase in debt may be a result of the soaring cost of living and the fact that about 25 percent of Americans make less than $10 an hour. Between 2003 and 2017, the U.S. saw a 30 percent increase in the cost of living with the wage increase falling behind at 28 percent. Medical expenses increased 57 percent, housing increased 32 percent and food increased 36 percent.
Millions of Americans also owe to a much more intimidating creditor, the IRS.
Why do Americans fall behind on their Taxes?
According to a 2017 survey, the average American pays $10,489 each year in federal, state and local taxes. This amount varies based on your gross income with current tax brackets ranging from 10 percent to 39.6 percent of your income.
There are many reasons that could cause an individual to fall behind on their taxes and it may be more common than many people realize. Many people may fall behind due to a breakdown in the family, such as a divorce. Others may lose their job and be unable to find new employment. There are also medical and health issues that can greatly affect an individual’s financial situation, such as an accident that results in hefty medical bills or an illness that can leave them unable to work.
What can happen if you owe the IRS money for taxes?
Unfortunately, it can be hard for many to find their way out of tax debt without professional help. When an individual owes the IRS money, there are many different consequences you could face.
While everyone’s individual situation is unique, here are some penalties that could be put in place:
Failure to file: If you do not file your taxes by the due date you can face a failure to file penalty. This penalty is five percent of your owed taxes each month until filed up to 25 percent total penality.
Lost refunds: You also lose out on your ability to receive a refund by not filing. The IRS reports over $1 billion in unclaimed refunds each year.
Failure to pay: If you file your taxes but do not pay, the penality is far less. The penalty is .05 percent of the amount of owed taxes each month to a maximum of 25 percent.
Interest charges: You will also be expected to pay interest on the amount owed on your taxes. The interest amount is the federal short-term rate, plus three percent.
In serious cases, the IRS can put a lien on your property, seize your property, garnish your wages or even revoke your passport.
Even if you are unable to pay your taxes, by filing you are able to reduce your penalty amount by 90 percent. You are also able to negotiate payment plans directly with the IRS. Those who owe a large amount in back taxes may benefit from speaking to a tax relief professional.
What is a Tax Relief Professional?
A tax relief professional is an individual who will negotiate with the IRS on your behalf. These professionals work towards settling a tax debt for a reduced amount, put a stop on wage garnishment and remove liens from personal property.
While many companies offer a free consultation,their services are not free. While each cost will vary depending on the experience of the tax professional hired and the complexity of the cost, here are some ballpark numbers from Cross Law Group:
- Installment Agreement: $750 – $1,500
- Offer in Compromise: $3,500 – $6,500
- Penalty Abatement: $1,000 – $2,500
- IRS Audit (simple): $2,000 – $3,500
- IRS Audit (complex): $5,000 +
- IRS Appeals: $5,000 – $7,500
- US Tax Court Litigation: $10,000 +
While the cost of hiring a tax professional may seem steep at first, many people have found that the savings on tax debt far outweighs the cost. One of the ways that many individuals are able to lower the amount they owe is through the IRS Fresh Start Initiative.
What is the IRS Fresh Start Initiative?
The Fresh Start Intiative (formerly the Fresh Start Program) refers to a change in the IRS policies and procedures that can help individuals and small business owners who owe back taxes to the IRS.
There are two different areas where relief can be given: an installment agreement and an offer in compromise.
Installment agreement: An installment agreement allows the taxpayer or business to pay their debt owed in monthly installments rather than a lump sum. Sometimes the amount owed is also reduced.
Offer in compromise: An offer in compromise is when the IRS agrees to receive an amount that is less than the total amount owed. This happens when the IRS looks at an individual’s personal finances and determines that they would receive more money, by agreeing to a lesser amount paid than trying to collect the full amount through their usual collection methods. This is a program that is offered by many tax relief professionals, although every individual situation is unique and some may not qualify for it.
Can I negotiate with the IRS on my own?
Yes. Individuals can negotiate with the IRS on their own as well. While it may seem appealing to file for an offer in compromise without the costs of a tax professional, having some expertise on your side may be worth it. In 2012 and 2013 the IRS accepted fewer than 50 percent of the applications filed for offer in compromise. It also put liens on 707,678 and 602,005 homes respectively.
No matter what option you choose to tackle your tax issue, the most important piece of advice is to act now. Simply filing your taxes can reduce your fees by 90 percent and many tax professionals offer a free consultation to give advice. It’s never too late to take the first step toward relief from tax debt.