How and When You Can Settle IRS Taxes For Less

how to reduce tax debt

Settling your taxes through an IRS program is possible for every taxpayer, but settling for less is not an option for everyone. Once you understand a bit of how the IRS works in determining qualifications for certain programs you will be able to determine which method the IRS will actually allow for your unique financial and tax situation. The IRS does not like to settle taxes because it means they receive less money from you, the taxpayer.

The IRS offers several methods for tax settlement. The first thing that the IRS looks at when considering a tax settlement is your financial situation. If you have the money to pay your entire tax debt you are not going to qualify for a reduced tax settlement. They know you have the money to pay, and for this reason they will make you do so.

Before you can offer a settlement you need to make sure that you are current on all your tax filings. If you have unfiled taxes it is required that these are all filed before working with the IRS on a settlement. The IRS will not even consider a settlement unless you are in full compliance of all tax codes.

Once you file all your taxes and know what you owe you can can begin deciding which settlement option the IRS would likely accept for your situation.

Step 1: Check to see if you qualify for Penalty Abatement

First thing to check is to see if you qualify for penalty abatement. If you have a good reason for not being in compliance with the filing requirements then there is a good chance you may qualify and may be able to get your penalties reduced.

Step 2: Check to see if you qualify for an IRS Installment Agreement

With an installment agreement you will be able to make monthly payments toward the tax amount owed. You do end up paying more than the total amount because interest is still accumulating with a small monthly penalty (a penalty that is significantly reduced from the amount if you were not in some sort of agreement).

If you qualify for an installment agreement then it is very unlikely that you will be able to qualify for a reduced tax settlement. The only way you may qualify for an installment agreement and still qualify for a reduced settlement is if making the monthly payments would cause extreme financial hardship and would not cover the cost of other basic necessities.

Step 3: Check to see if you qualify for an Offer in Compromise

When it comes to settling taxes this is the most sought after method. With an offer in compromise you can negotiate with the IRS and pay what you can afford. Of course, you have to be eligible for this before you can move forward. The IRS must be willing to accept your offer for your debt to be wiped out for less than what you owe. It is your job to convince the IRS that you are in bad financial standing, and that your offer is more than what they would be able to receive through a forced collection.

If none of the above options work for you, then move on to the last and final step.

Step 4: Prove Financial Hardship and Account Placed on “Hardship”

If you have exhausted all options and could not come to a settlement with the IRS then it is highly likely that they will consider you for uncollectible status. When placed under this status you will still owe the IRS money and interest will continue to accrue, but all collection activities will be temporarily put on hold. The IRS will continue to monitor your financial situation over-time and when/if it improves, they will require you to begin paying back the taxes owed.

If you want to settle taxes in any of the ways detailed above, you will want to contact a professional. It can be difficult to decipher the tax code and know which settlement method will work best for you. Hiring a tax professional allows you to learn more about each settlement option, which option is bet, which forms you need to fill out and how to proceed with the resolution.

Tax Settlement Help & Related Topics


Tax Problem How To Guides
Answers to common tax problems pertaining to unpaid taxes, tax debt, tax liens and back taxes.

IRS Tax Settlement Guide
Understand what a tax settlement is, how it works, and the various options taxpayers have to settle taxes with the IRS.

Help with an Offer in Compromise Settlement
Do you need help with an Offer in Compromise? Our Tax Team (IRS Agents, Tax Attorneys, CPAs) can analyze your tax and financial situation to see if you qualify and file appropriate tax documents if you do or find the next best option for you.

IRS Tax Payment Plans Guide
A guide to finding the most appropriate way for you to pay your taxes back in full or through monthly installments.

Guide to Filing and Paying Back Taxes
A guide that would walk you through filing unfiled tax returns and paying taxes that are owed to the IRS.

How & When you Can Negotiate With the IRS
Understand when taxes can get negotiated for less and what methods can be used. If you can’t negotiate for less understand your alternative options.

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