Advice | IRS is waiving $1B in penalties. Beware of tax debt relief companies.
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In 2022, short-staffed and struggling to dig out of an enormous pandemic-related backlog, the IRS temporarily suspended the mailing of automated reminders to taxpayers about overdue tax bills for 2020 and 2021. The invoices would have normally been issued after an initial balance-due notice was issued.
With many pandemic issues behind it and staffing up thanks to the Inflation Reduction Act’s boost to the agency’s budget, the IRS announced it will resume mailing collection notices for the 2021 and 2022 tax years in January.
The notices may shock folks who haven’t received an IRS bill for over a year, Werfel said during a press call.
For individual taxpayers, the median amount owed is $6,751, according to the agency.
“Given that penalties and interest continued to accrue under law, the bill amounts for those who weren’t paying will be larger than the last time they received a letter from the IRS,” Werfel said. “For these affected taxpayers, we know this is a tough situation.”
So, showing a softer side, the IRS has decided to waive the failure-to-pay penalties for about 4.7 million individuals, businesses, trusts and tax-exempt organizations that didn’t get automated reminders of their debts.
It’s a $1 billion savings, or about $206 per return.
“Many people receiving this relief are average, hard-working taxpayers,” Werfel said.
But Werfel also issued a caution.
“People with unpaid tax bills also need to be wary about aggressive marketing by some places that overinflate promises of wiping out IRS debt,” he said.
There are unscrupulous tax debt settlement companies and scammers who will no doubt try to take advantage of this relief. They may use it as a hook to con you or get you to sign up for an expensive service you don’t need.
“We have seen patterns of behavior in the past where marketers and promoters exploit an opportunity like this,” Werfel said.
Debtors, out of fear or desperation, often are drawn to the commercials promising too-good-to-be-true deliverance.
The companies claim they have a team of experts who can help you escape most of your tax obligations, including penalties.
What people may not know is that the pennies-on-the-dollar promise often involves what’s called an “Offer in Compromise,” or OIC. Although this is a legitimate program offered by the IRS, it’s intended to help people experiencing economic hardship that would make it unlikely the agency could collect all that the government is due.
Beware of what the IRS calls Offer in Compromise “mills.”
The tax debt relief companies may not adequately disclose that getting an OIC accepted is tough. To qualify, the IRS will look at your income, your expenses, your ability to pay and, most importantly, whether you have any assets — including equity in your home.
“Some people simply don’t qualify for these deals,” Werfel said.
In fiscal 2022, taxpayers proposed 36,022 Offers in Compromise to settle existing tax liabilities for less than the full amount owed. The IRS accepted 13,165, just 36 percent.
You can apply for an OIC yourself. At irs.gov, search for the “Offer in Compromise Qualifier” tool to see if you’re eligible. If the results indicate you aren’t, you should still contact the IRS. You can still make a case that you have extenuating circumstances — such as a serious illness — that prevent you from paying your taxes in full.
In the worst cases, the tax debt relief company is a complete con and will take your money and do nothing.
Or, the firm will require thousands of dollars for work you can do yourself, money that could be put toward your tax bill.
I intervened in time to prevent a young business owner, who owed the IRS about $80,000, from having to pay $8,000 over three years to a tax settlement company. By the way, that amount included a 20.99 percent finance charge. Thankfully, he was within the three-day cancellation window.
I encouraged the person to deal directly with the IRS. On his own, he was able to get an affordable payment plan for his tax debt.
Heed Werfel’s warning: Your first contact should be the IRS — not the number you hear on a television or radio ad promising tax relief.
If you receive a collection notice for tax years 2020 and/or 2021, here’s what you need to know:
Eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations that filed the IRS Form 1040, 1120 or 1041 and the 990-T income tax returns for the 2020 and 2021 tax years.
You had to be in the IRS collection notice process or be issued an initial balance-due notice between Feb. 5, 2022, and Dec. 7, 2023.
The penalty relief applies only to eligible taxpayers owing less than $100,000 per tax year.
Penalty relief is automatic
You don’t need to take any action to get the penalty waiver.
Eligible taxpayers who have already paid what they owed will also benefit. If you paid a failure-to-pay penalty related to your 2020 and 2021 tax years, the IRS will issue a credit or refund.
The relief also is temporary
The failure-to-pay penalty will start up again on April 1. This penalty is usually one-half of 1 percent of the tax owed for each month or part of a month that the payment is late, up to 25 percent.
“Of course, if you pay in full, there won’t be any further accrual,” said IRS spokesman Eric Smith. “If you can’t pay in full, the real advantage of setting up an installment agreement with the IRS is that it cuts future late-payment penalty accruals in half.”
Under federal law, the IRS is required to charge interest when taxpayers don’t pay their balances on time.
“We do not legally have the authority to waive this interest,” Werfel said.
The current interest rate is 8 percent, and it would apply to any outstanding tax debt now accruing.
Look for the payment reminder
The IRS will be issuing a special reminder letter to many of the eligible taxpayers starting next month. The letter will lay out your tax liability and include ways to pay what you owe.
Don’t ignore the letter. Review the information you receive.
“That’s important because time does not make these past-due tax bills get any better,” Werfel said.
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