IRS Tax Settlement – How & When You Can Settle For Less

tax settlement

A tax settlement is when you pay less than you owe and the IRS erases the rest of your tax debt. If you don’t have enough money to pay in full or make payments, the IRS may let you settle. The IRS also reverses penalties for qualifying taxpayers.

How Does a Tax Settlement Work?

You determine which type of settlement you want and submit the application forms to the IRS. The IRS reviews your application and requests more information if needed. If the IRS does not accept your settlement offer, you need to make alternative arrangements. Otherwise, collection activity will resume. If the IRS accepts your settlement offer, you just make the payments as arranged.

At that point, you are in good standing with the IRS, but if you default on the terms of the agreement, the IRS may revoke the settlement offer.

To explain, imagine you owe the IRS $20,000, and the IRS agrees to accept a $5,000 settlement. You agree to make five $1,000 payments over the next five months. However, you pay $2,000 and then stop making payments. In this case, the IRS credits the $2,000 to your tax debt, but it cancels the settlement agreement and resumes collection activity.

How to Settle Taxes Owed

These are the basic steps you need to follow if you want to settle tax debt.

  • File Back Taxes—The IRS only accepts settlement offers if you have filed all your required tax returns. If you have unfiled returns, make sure to file those returns before applying. You also must be up to date on your current tax obligations. For businesses, that includes payroll taxes and sales taxes, and for individuals, it includes estimated quarterly taxes or withholding.
  • Amend Ghost Returns— In some cases, if you have unfiled back taxes, the IRS creates a substitute for return (SFR) for you. These “ghost” returns do not include all of your potential exemptions and deductions. As a result, your tax debt is probably higher than it should be. If the IRS has created an SFR for you, contact a tax professional to help you prepare an amended return. In some cases, it may help to lower your tax debt and makes it easier to get a lesser settlement. If you don’t qualify for a tax settlement for less money, then it will ensure you are paying back a lower amount of taxes and penalties that are due.
  • Apply for a Settlement— Once you are in tax compliance, you can start to apply for a settlement. A tax professional can help you determine which settlement offer is right for your situation. There are multiple ways to settle your tax debt.

Ways to Settle Taxes for Less

Here is an overview of the main ways that you can settle your tax debt for less than you owe:

Offer in Compromise

An offer in compromise is the most sought after settlement method, but it is hard to get. The IRS requires very detailed financial information. To get your offer accepted, you have to convince the IRS that you cannot pay more now or in the future.

With a lump sum cash offer in compromise, you make a 20 percent upfront payment and pay the rest of the settlement within five months. With a periodic payment offer in compromise, you pay the settlement over six to 24 months.

Partial Payment Installment Agreement

A partial payment installment agreement allows you to make monthly payments on your tax debt. You make payments over several years, but you don’t pay all of the debt. As you make payments, some of the debt expires. That happens on the collection statute expiration date.

Penalty Abatement

Penalty abatement is when the IRS erases all or some of the tax penalties. There are multiple ways to qualify for penalty abatement. The IRS realizes that there are legitimate reasons for not paying or filing on time, and the agency created penalty abatement for this purpose. In particular, if you are late for the first time, it’s easy to get all of your penalties erased.

When You Can’t Settle Taxes For Less

If you don’t qualify for a settlement, you don’t necessarily have to pay your taxes in full right away. The IRS is surprisingly willing to work with delinquent taxpayers, and there is a range of other programs and options. Here are some of the most popular options.

Installment Agreement

An installment agreement is the most common method to pay back taxes to the IRS. With an installment agreement, you make monthly payments until you have paid the debt in full. If you personally owe less than $100,000 or if your business owes less than $25,000, it is relatively easy to get an installment agreement. As of 2017, the IRS gives taxpayers up to 84 months (7 years) to complete their payment plans.

Uncollectible Status / Financial Hardship

This option may get you off the hook temporarily. If you cannot afford to pay anything or if your tax debt is creating an undue financial hardship, you may be able to qualify for uncollectible status. Typically, the IRS reviews your account every couple years. If your financial situation improves, you may have to begin paying the debt back. However, if your financial situation does not improve, then it is likely that the statute of limitations on the debt will expire before the IRS collects & the liability for those years in the agreement will not be owed.

Settling State Owed Taxes

If you owe federal and state taxes, you must resolve those debts separately. Each state has its settlement programs. Some states have settlement programs that are very close to the IRS settlement methods, and others have drastically different programs. Review the state you owe taxes in to find what resolutions are offered by the state.

Important Tax Settlement Notes

If you want the IRS to stop collection activities, you need to make arrangements. If you don’t set something up, the IRS will continue to try to get the money in other ways. A lot of the process is automated, and if you don’t prove your situation to the IRS, the IRS will have no idea that you are experiencing financial hardship.

Dealing with the IRS is complicated and confusing. To ensure you get the best settlement for your needs, you should work with a tax settlement professional. A tax professional will analyze your situation and points you in the right direction. In most cases, they can let you know if your settlement offer is going to get approved before you even apply.

Tax Settlement Help and Guidance

Offer in Compromise
If you have heard the term settling for pennies on the dollar, this is how it is done. Don’t expect this to be easy though, the IRS is very picky about who will qualify.

Partial Payment Installment Agreement
This settlement will allow you to pay back IRS taxes in monthly amounts that are less than the total amount owed, that is if you don’t qualify for the regular installment agreement

Penalty Abatement
Remove all of or part of your penalties owed by the IRS by proving to them you had a legitimate reason for not filing or paying your taxes on time.

IRS Payment Plans
When you are unable to pay your taxes in full the IRS offers several options for taxpayers to pay back their tax liabilities.

State Tax Settlement
Each state has their own state tax settlement programs. Use this guide to select your state to find out the settlement programs offered.

Tax Settlement Help
Do you need help settling taxes? Our Tax Team (Tax Attorneys, Tax Lawyers, CPA’s, IRS Agents) can find the best tax settlement method for your situation. Find out how our tax settlement service works.

File Back Taxes
If you still have unfiled returns it will be required that you file your back taxes before you can attempt at getting a settlement with the IRS.

Tax On Debt Settlement
Understand how the IRS tax on debt that is settled, canceled, or forgiven works. Find out exceptions to reporting settled debt as income on your tax return.