Know Your IRS Tax Relief Options

Andrea Miller
Expert Contributor
Last Updated:

The IRS offers several tax relief options for taxpayers that may be going through difficult financial times. Depending on the circumstances and the amount of tax involved, these measures can vary from deferred payments to debt forgiveness. You, of course, need to meet certain conditions to qualify for such relief programs. If your tax debts are greater than your income and assets put together, or if repaying the tax debts puts you into undue economic hardship, you should consider seeking tax relief services from an experienced tax counselor.

Tax Relief Options Under the IRS Fresh Start Initiative

The first of a few tax relief options is the IRS Fresh Start Initiative originally started in 2008  and has since undergone frequent changes and expansions to accommodate a higher number of taxpayers, aiming to make things easier for individuals and businesses struggling to pay their tax debts. For instance, if you’ve been unemployed for 30 days on end, you can now apply for a six-month extension to pay your taxes without any penalties for the delay.

Relief Types

There are four major types of tax relief options provided under the Fresh Start Initiative:

  • Penalty relief
  • Installment agreements
  • Offers in compromise
  • Lien removal

Penalty Relief: Requesting Extension of Time for Payment

If you fail to pay your taxes on time, the IRS imposes interest and penalty on the unpaid amount. Currently, failure to file a tax return attracts a penalty of 5% per month, whereas the penalty for failing to pay the taxes is half a percent per month, subject to a cap of 25% in either case. Similarly, there is an interest rate of 3% per annum charged on the unpaid tax balance.

However, as a measure of temporary relief, the IRS provides a grace period of six months to salaried and self-employed taxpayers qualifying under the Fresh Start Initiative. You can request a payment extension without being liable to pay the penalty for delay in tax payment.

Know Your IRS Tax Relief Options

Note that the relief is only in respect of “non-payment” penalty. You will still be liable to pay the “non-filing” penalty if you fail to file your tax return on time. Similarly, you will also have to pay the normal interest of 3% per annum on the unpaid tax amount.

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Eligibility Criteria

In order to qualify for a penalty relief under the Fresh Start Initiative, you must meet the following eligibility requirements:

  • If you are a wage earner, you must be unemployed for at least 30 days continuously.
  • If you are self-employed, your net income must have dropped by at least 25%.
  • Your tax debt must not be more than $50,000.
  • Your annual income must be within $200,000 if you are filing jointly with your spouse or within $100,000 if you are filing individually.

If you meet the above criteria, you can submit a request in Form 1127A, which can be downloaded from the IRS website.

If the IRS is satisfied that collecting the tax debts would cause you undue hardship, it will mark your account as “currently not collectible” and delay the collection temporarily. However, the process does not allow for making any changes in the amount of tax you owe. In fact, your tax liability will increase because of the annual interest.

Tax Relief Through Payment Agreements

If your tax debt does not exceed $50,000 ($25,000 in case of a business), you may be eligible to work out a repayment plan with the IRS. The repayment period depends upon the schedule you negotiate with the IRS and can go up to 72 months in some cases.

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Installment agreements offer relief in that the IRS will not treat you as a defaulter. However, you will still continue to pay interest on your tax debts.

Types of Payment Agreements

There are two major types of online payment agreements:

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  • Monthly installment plans
  • Short-term extensions of tax repayment period

Monthly Installment Plan

This is the most common type of repayment plan, wherein you can repay your tax debts in monthly installments.

Short-Term Payment Extension

This repayment agreement is for taxpayers with less than $100,000 in tax debts. Under this plan, you can get up to 120 days to repay your dues to the IRS.

How to Apply

You can submit an online request for an online payment agreement. The IRS gives its decision almost immediately. Alternatively, you can apply to set up a payment agreement by filing Form 9465. However, you must have filed your tax returns before placing such request.

Usually, you can expect a response from the IRS within 30 days of filing the request. If they approve your application, you will receive a notice containing information about the payment agreement. An invoice for the setup fee, if any, accompanies the notice.

Setup Fees

The fee for setting up a monthly installment agreement is $120. However, if you choose to make payments through direct debit mode, the fee reduces to $52. Taxpayers falling under a lower income group may be eligible for a lower fee of $43. There is no setup fee for short-term payment agreements with a repayment period of 120 days.

Making Payments

You can choose to pay the installments by direct debit, check, credit card, money order, or payroll deduction. If you are applying for a streamlined installment agreement, you must agree to pay through direct debit.

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After the payment of each installment, the IRS sends you a notice showing the remaining balance of taxes. This happens in all modes of payment except direct debit, where your bank statement serves as a payment proof.

While negotiating a repayment agreement, you should keep your future tax obligations in mind because you would be paying them as well in addition to the monthly installments. The IRS is very particular about timely payment of installments. If you delay or miss the payment of even a single installment, your payment agreement is canceled, and you will have to seek relief all over again, this time with the risk of being considered “unreliable” by the IRS.

Repayment Schedule

  • If the amount of tax debts is less than $10,000, you can file an online application for a repayment period of up to three years.
  • If the amount of tax debts is more than $10,000 but does not exceed $50,000, you can negotiate for a streamlined installment agreement with a repayment period of up to six years.
  • For tax debts of over $50,000 for individuals and $25,000 for businesses, you must file a request with the IRS in Form 9465, along with the Collection Information Statement in an appropriate form. You may be able to negotiate a longer repayment period with the IRS.

Tax Debt Settlement Through Offers in Compromise

An offer in compromise is meant for taxpayers who cannot repay their tax debts in full. It allows you to settle your tax dues for a partial payment, with the IRS agreeing to forgive the rest. A compromise settlement works in favor of both the taxpayer as well as the government. On one hand, it absolves you of your tax liability for a lesser payment, while on the other, it helps the IRS recover the maximum amount it can.

Strict Eligibility Requirements

These tax relief options are not for all taxpayers. It has stringent eligibility requirements and involves a lot of paperwork. You should consider applying for an offer in compromise only in the following circumstances:

  • You can convince the IRS that you cannot pay the original amount of taxes.
  • You have a legitimate reason to believe that you may not actually owe the assessed amount of taxes.
  • Paying the original amount of taxes would cause you undue financial hardship; for example, if you need the money for your child’s medical treatment.

You do not qualify for an offer in compromise if:

  • You can pay your taxes through an installment agreement
  • Your tax filing is not up-to-date
  • You are involved in a bankruptcy proceeding

How to Apply

You should submit a compromise offer in Form 656 along with a collection information statement in Form 433A or 433B. For Form 656, you must pay a filing fee of $186. If your tax debt includes taxes for an individual and a business, you must submit two 656 forms, one each for individual and business tax debts, and pay a separate filing fee ($186) for each form. In addition to the filing fee, you must also pay the amount of initial offer.

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In order to increase your chances of approval, you should propose a reasonable settlement offer that reflects your true ability to repay the debts. The application will require you to provide detailed financial information including the details of assets, expenses, and projected income in near future.

There is no specific timeframe for receiving a response from the IRS. However, if there is no response from the IRS within two years of making the offer, the application is considered as accepted.

Immediately after filing the application, you must start making periodic payments, if you chose such form of repayment. Failure to make such payment will result in rejection of the application.

If the IRS rejects your offer, you can file an appeal within 30 days. If the IRS accepts your offer, you must file and pay your taxes on time for at least another five years.

How to Handle Tax Liens

If you fail to pay your taxes on time, the IRS can place a claim on your property. This is known as a tax lien. Usually, the IRS places a tax lien only in cases where the amount of unpaid tax is more than $10,000. Receiving a tax lien notice from the IRS can be extremely stressful. It negatively impacts your creditworthiness.

You should contact the IRS as soon as possible to find out the complete details and tax relief options. You may qualify for an appeal in the following circumstances:

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  • The IRS placed the lien as a result of some error.
  • You have fully paid your tax debt.
  • The tax amount is incorrect, and you didn’t get the opportunity to dispute it.
  • You filed for bankruptcy before the IRS placed the lien.
  • The lien is in respect of the tax debt barred by the statute of limitations.

You can also request the IRS remove the tax lien if:

  • You have entered into an installment agreement with the IRS and are paying through the direct debit mode.
  • Removal of lien will enable you to pay your tax debts faster.

The IRS makes a decision on the merits of each case. Withdrawal of lien, however, does not reduce the amount of your tax debt.

Tax Lien vs. Tax Levy

A tax lien differs from a tax levy. A tax lien gives the IRS a claim on your property, whereas a tax levy results in the seizure of your property. There are different types of tax levies the IRS can place. These include a levy on your wages or salary (wage garnishment), on your financial assets, on movable or immovable property, and on social security payment (social security garnishment).

It may be noted that the IRS uses lien and levy as the last resort to recover its tax dues.

Disaster-Specific Tax Relief

The IRS often announces tax relief options for taxpayers affected by certain natural disasters. The relief in such cases is limited to a certain geographical area. For example, there are a number of tax relief measures provided for the victims of hurricanes Irma and Maria. These include extension of tax deadlines in Puerto Rico and the U.S. Virgin Islands, special tax relief in the Presidential Disaster Areas, and payment relief in areas identified for individual assistance.

The IRS announced similar relief measures for the victims of Harvey hurricane as well. Affected taxpayers can find out more about these special reliefs on the IRS website.

The Importance of Professional Tax Relief Services

Understanding your eligibility and applying for a specific tax relief program isn’t an easy task. A professional tax relief service can help you evaluate tax relief options and apply for a relief program that’s right for you. If you are looking for ways to come out of your tax debt, take a look at Solvable’s tax relief reviews of some of the most reliable companies in the tax resolution industry. Call us any time should you need any more information or help with your tax debts.


Andrea Miller
Expert Contributor
Last Updated: