Tax debt relief: What is it and how does it work? | finder.com
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Tax debt relief

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You can tackle tax debt on your own or hire a third-party.

While there are many companies that can help you settle up with the government, third parties aren’t the only solution. There are a handful of ways you can get back on track.

What is tax debt relief?

Tax debt relief is a broad term that covers any incentive, program or service that helps you reduce or eliminate your outstanding tax debts. Some of the more popular methods include:

  • Tax credit. A credit that’s applied to the amount you owe to reduce your overall debt.
  • Tax relief service. A company or service designed to help you reduce, repay or eliminate tax debt.
  • Tax deduction. A reduction in your taxable income that reduces the amount owed to the government.
  • Tax exclusion. Certain types of income or expenses are exempt from taxes, reducing the amount of tax paid to the government.
  • Tax debt forgiveness. Programs that allow you to settle debts for a percentage of the original amount.

Is there tax relief at the state level?

Yes. While many tax relief programs exist at the federal level, there are also state options. They’re generally covered by the same laws and procedures that govern federal tax relief. However, availability of programs, credits and other forms of tax relief vary from state to state.

Pros and cons of settling tax debt through a company

Tax relief services are designed to take the stress out of tax debt, helping you determine how much you owe and the best way to settle your debts.

Pros

  • Free consultation. Many tax debt relief companies offer free consultations to determine exactly how much you owe and to whom. This can give you a better idea of where you stand.
  • Offer resource. These companies specialize in debt relief — meaning they likely know about programs, incentives, tips and tricks that you might not be aware of.
  • Negotiate on your behalf. Rather than dealing with the IRS yourself, debt relief services negotiate your debts on your behalf.
  • Efficiency. Debt relief services are designed to help you understand your situation and resolve it efficiently. In other words, you won’t need to chase down balances or deal with the IRS.
  • Single payment. Some companies can consolidate your debt, making for a single monthly payment that’s lower than the sum of your old payments.

Cons

  • Fees.Regardless of which tax debt relief company you choose, you’ll be charged a fee for their services.
  • Potential for scams. Some companies prey on those in debt by charging high fees up front or making unrealistic promises without actually taking any action.
  • Success isn’t guaranteed. While debt relief companies aim to help you make your debt more manageable, there’s no guarantee they’ll be successful.
  • Money saved could be taxable. If you manage to settle your debt for a lower amount, the value of the reduction can be considered taxable income.
  • Damaged credit score. If the IRS files a lien on your debt, your credit score will most likely be negatively impacted.

Before you sign up with a debt relief company

Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. You might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.

Consider alternatives before signing up with a debt relief company:

  • Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
  • Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
  • Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.

What happens if I don’t pay back the IRS?

If you avoid repaying your tax debt for long enough, there are a handful of consequences that could make things even more complicated:

  • Wage garnishments. If you don’t come to an agreement with the IRS, your wages may be garnished until your debts are paid off.
  • Interest and penalties. You’ll likely be charged a failure to pay penalty, which is 0.5% of your debt for each month after the due date, and up to a total of 25% of the amount of your debt.
  • Tax lien on your property. The IRS can file a federal tax lien, which gives them claim to your property and notifies credit agencies, which will likely hurt your credit score.
  • Levied assets. The IRS can also levy your assets, which means they can seize things like wages, bank accounts, retirement income and property, then sell it to settle your tax debt.
  • Jail time. In extreme cases, you could be prosecuted for tax fraud if you deliberately avoid repaying your tax debts.

How to identify a tax debt relief scam

People in tax debt are often targeted by scammers looking to take advantage of their vulnerability. But there are a few ways to identify a tax debt relief scam:

  • Track record. Reputable tax debt relief companies will often have testimonials, reviews and an online presence that you can use to verify their claims.
  • Up-front fees. Most legitimate tax debt relief companies won’t ask for fees up front, or will only ask for a small amount.
  • They contact you first. Avoid companies that reach out to you by phone, email or mail.
  • Ignoring your financial situation. Be wary if a company claims to know how to help you without knowing about your financial situation.
  • Making unreasonable promises. Watch out for companies that make big promises like guaranteed success, waived penalties and other claims.
  • Delaying your case. Be careful if you find that a company keeps creating delays, as they could be giving you the run around while your debt accumulates.
  • No local office.While it’s possible for companies to operate remotely, it’s safer to choose a tax debt relief company with a local office so you can verify that it’s legitimate.

Can I solve my tax debt without a 3rd party?

Yes, it’s possible to solve your tax debt on your own. Some options include:

Bottom line

Tax debt relief is a real solution for those who aren’t able to pay back their tax debt, but it’s not the only answer. As long as you’re willing to negotiate with the IRS, there are a handful of ways you can solve tax debt on your own.

But if you want to avoid chasing down balances and dealing with creditors, compare other ways to help you overcome tax debt.

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