The Internal Revenue Service plans to offer several new ways to help people struggling to meet their tax obligations because of the recession, and will expand its Free File program to allow nearly all taxpayers to electronically file their taxes for free.
IRS employees now have more flexibility to assist struggling taxpayers in a wide range of situations. Depending on the circumstances, taxpayers may be able to adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action.
IRS employees will have greater authority to suspend collection actions in certain hardship cases, including when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income, or is facing devastating illness or significant medical bills.
The IRS is also allowing more flexibility for previously compliant individuals in existing installment agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the installment agreement.
An offer in compromise, an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties, but the equity taxpayers have in real property can be a barrier to an OIC being accepted.
With the uncertainty in the housing market, the IRS said it recognizes that the real estate valuations used to assess someone's ability to pay may not be accurate. So in instances where the accuracy of local real estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate. Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for options to help them avoid default.
The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options.
Taxpayers with financial problems who discover they can't pay when they file their 2008 tax returns also have options available. The IRS.gov site has a list of "what if" scenarios that deal with payments and other financial problems. These scenarios, in question-and-answer format, provide information on specific actions taxpayers can take. Taxpayers unable to pay in full can also contact the IRS.
The IRS in 2009 is again offering free tax preparation and filing through its Free File program, in partnership with tax software vendors. Anyone with an adjusted gross income up to $56,000 can use the standard Free File options this year, opening the program to approximately 98 million Americans.
This year the IRS and its partners are offering a new option, Free File Fillable Tax Forms, that opens up Free File to virtually everyone, even those whose incomes exceed $56,000. Free File Fillable Tax Forms allow taxpayers to fill out and file their tax forms electronically, just as they would on paper. This option does not include an "interview" process like the other Free File offerings, but it does allow taxpayers to enter their tax data, perform basic math calculations, sign electronically, print their returns for recordkeeping and e-file their returns. More information will be available later this month.
The IRS also reminded taxpayers of several new credits they may qualify for this tax season. The First-Time Homebuyer Credit is available to those who bought a principal residence recently or are considering buying one. The credit is for up to $7,500.
The Recovery Rebate Credit is figured like last year's economic stimulus payments, except that Recovery Rebate Credit amounts are based on tax year 2008 instead of 2007. Most people have already received their full benefit in the form of the economic stimulus payment. However, a taxpayer may qualify for the Recovery Rebate Credit, if, for example, he or she did not receive an economic stimulus payment, had a child in 2008 or had a change in income level.
With the Standard Deduction for Real Estate Taxes, taxpayers can now claim an additional standard deduction, based on the state or local real estate taxes paid in 2008. The maximum deduction is $500, or $1,000 for joint filers.
In addition, for most homeowners, mortgage workouts and foreclosures are now tax-free. Eligible homeowners can exclude the debt forgiven on their principal residence if the balance of the loan was less than $2 million. The limit is $1 million for a married person filing a separate return. See Form 982 and its instructions for details.
