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  • Writer's pictureJayson M. Thornton, CFP

How to Settle a Tax Debt

Updated: Jun 21, 2022

What is a Tax Settlement?

A tax settlement is when a taxpayer settles their tax liabilities through one of the IRS programs/filings. The IRS offers settlements to taxpayers that are struggling with their tax debts or have valid reasons to abate their penalties. The IRS offers several different options for taxpayers to settle their taxes owed. The main factor the IRS takes into consideration when determining if the taxpayer will qualify for a tax settlement is their financial situation. The tax settlement that a taxpayer qualifies for is dependent upon their unique financial situation. The IRS prefers individuals to pay their taxes owed in full, but they will make exceptions for certain circumstances.

How an IRS Settlement Works

The IRS will allow a taxpayer to either negotiate a tax settlement for less than the total amount owed or come to an agreement on another method for the IRS to collect taxes owed over time. For either of these situations the taxpayer must meet the qualifications of one of the tax settlement programs set forth by the IRS. The taxpayer will first have to determine which type of tax settlement they would like to apply for and then submit the appropriate forms to the IRS for review before making a decision. A taxpayer can either fill out the information themselves or they can have a designated tax professional make the filing on their behalf. Once a settlement has been reached by both parties, the taxpayer will be considered good standing with the IRS for the tax year/years that the settlement covered (unless the taxpayer defaults or doesn’t hold up to all the terms of the agreement).

How to Settle Taxes Owed

In order to make a settlement or agreement over your taxes, you first need to make sure you are in full compliance with your tax filings and be sure to file any unfiled tax returns. If you did not file and the IRS has filed for you, it is highly suggested you use a tax professional to file an amended return to decrease the amount of taxes owed (this is because the IRS does not give the taxpayer the benefit of the doubt on anything when they file for an individual and it is highly likely that they owe far less). Once you have filed and know how much you owe, you can review the tax settlement options and see what settlement method would qualify for (if any at all).

The following is a list of different tax settlements offered by the IRS.

Settling Taxes for Less - Offer in Compromise

An offer in compromise is the most common settlement method individuals think about when it comes to settling with the IRS. Not only is this the most thought of method, but also the hardest one to qualify for. With an offer in compromise you will be required to make an offer to the IRS of an amount of money that you can afford to pay (payment plans available) and the IRS must be willing to accept that amount of money in order to wipe the remaining liability clean. When making the offer you will have to convince the IRS that the amount you offer them is equal to or greater than the amount that they would be able to collect from you through forced collections without forcing you into financial hardship.

Partial Payment Installment Agreement

A partial payment installment agreement allows the taxpayer to enter into an agreement with the IRS to pay back the taxes owed over a specified time and this amount can be less than the total amount initially owed to the IRS. This option is typically available to those individuals that cannot meet the minimum payment amount required with the normal installment agreement.

Penalty Abatement

Penalty abatement allows the taxpayer to eliminate all or part of penalties owed. Penalty abatement does not eliminate any of the base amount of tax owed, just penalties added onto that initial amount. This is one of the easier ways to settle taxes owed for less. The IRS uses penalties as a way to bully taxpayers and scaring them into paying sooner. The IRS does realize that there are times that the taxpayer has a legitimate reason for not paying or filing on time and they have created penalty abatement for this reason.

When You Can’t Settle Taxes For Less

Installment Agreement

An installment agreement is the most common method for individuals to pay back IRS taxes owed if they cannot pay in full. Under this form of agreement the taxpayer is allowed to pay back the taxes they owe in monthly payments if they can pay off the entire amount owed in a three year period. This agreement is fairly easy to obtain if an amount of $25,000 or less is owed, if greater, a tax professional will be needed for assistance.

Uncollectible Status / Financial Hardship

This form of agreement puts the taxpayer off the hook temporarily until their financial situation has improved enough for the IRS to begin taking collection actions against them again.

Settling State Owed Taxes

If you owe IRS and state taxes you must settle state taxes separately. Each state has their own settlement programs that are offered to taxpayers. Some states have settlement programs that follow very closely to IRS settlement methods and others have drastically different programs.

Important Tax Settlement Notes

An important thing to know about the IRS is that they will continue to enforce collections on individuals even if they cannot pay. Even if these collections cause extreme financial hardship on the taxpayer the IRS will not stop until the taxpayer proves to the IRS that they cannot pay. The IRS is a very automated machine and collections can only be stopped by tax filings. The IRS does not intend to put individuals in severe financial hardship, their system just has no way of knowing without receiving a tax settlement filing. The IRS is very complex and it is advised to use a tax settlement professional when attempting to make a settlement with the IRS.

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