It can be extremely stressful to be in debt with the IRS or to owe them money. If you find yourself in this situation, take a deep breath, and learn about the potential ways to receive an IRS tax settlement under certain circumstances.
If you have ever been in debt to the IRS, you know how bleak it can feel. But don’t give up on hope. While it is in the government’s best interests that you pay off every last bit of what you owe, the IRS knows that this isn’t always possible – and under specific circumstances, you can seek an IRS tax settlement.
But before you get your hopes up, it is important to understand what that means.
What Does an IRS Tax Settlement Entail?
The IRS will not let you off the hook without a very good reason. Neither will they reduce what you owe on the premise that you just don’t want to part with that much money.
Taxpayers who demonstrably cannot pay off their debt within its lifetime, as per the statute of limitations on IRS collection actions, may be able to convince the IRS to an offer that is financially feasible, giving you a shot at a clean slate, and giving them a higher likelihood of at least collecting some of your debt before it invariably expires.
This is among the more common ways in which the IRS may compromise on your tax situation by giving you an IRS tax settlement.
Can I Avoid Paying?
A much rarer option is to find a reason to avoid paying. This is exceptionally rare, as it usually entails that the IRS made a mistake and attributed a debt or penalty to your tax account that you aren’t actually liable for. For example, the IRS may have reversed a deduction that you do in fact qualify for or attributed a penalty where none was due.
If you can prove this, then you must file an appeal on your tax situation as soon as possible via the IRS’ Independent Office of Appeals or the United States Tax Court. In both cases, it is highly recommended that you speak with a tax attorney first, and make sure that you’ve got every detail of your situation straight. Proving the IRS wrong isn’t an easy task, but if you’ve got the paperwork to back it up, you might not need to pay as much as you’d expect or pay at all.
There are a few other ways to reach an IRS tax settlement. But very few cases, if any, allow you to avoid paying anything at all. You will need to take a serious look at your finances and figure out how you can effectively argue that you might not be able to pay what you owe – based on your income, assets, expenses, and number of dependents.
Understanding the Different Types of IRS Tax Settlements
Aside from taking the IRS to court or filing an appeal, there are four major ways in which you can drastically reduce what you owe to the IRS, or otherwise halt collection efforts and buy yourself some time.
These tax settlements can be crucial tools in negotiating with the IRS and figuring out how best to deal with your debt, but you shouldn’t count on your chances without first consulting a tax professional. Let’s go over each type of IRS tax settlement together.
1. Installment Agreements
When approaching the IRS on the topic of settling your tax account and paying off your debt, you must make an offer to either pay now, or pay in rates, either in the short-term (within 180 days) or long-term (more than 180 days). If you decide to pay your debt off over the course of more than 180 days, via monthly payments, you will be entering into an installment agreement, also known as payment plans.
When opting to pay immediately, the IRS requires absolutely no setup fees and accepts most types of payment, such as check, money order, debit and credit cards, or electronic payment via the Electronic Federal Tax Payment System.
But on the topic of installment agreements, there are a few minor fees, and considerations. You can opt to have your payment automatically withdrawn at a reduced setup fee, as well as a lower risk of defaulting, or choose to pay manually, albeit with a substantially higher setup fee.
You can check out the installment agreement application via the IRS here, and learn more about how it works.
2. Offer in Compromise
If you cannot afford to pay off your debt via monthly installments, you may be able to argue for a reduced total debt. However, it will be on you to make a convincing case. The IRS requires that taxpayers create offers in compromise to send to the IRS for review.
In this type of IRS tax settlement, it is effectively a proposal on your part on what you can pay every month, to pay off your debt.
The IRS is usually hard-pressed to accept these offers, so you need to ensure that you qualify. They have their own pre-qualifier tool, but it also helps to go over your finances with a professional.
The IRS utilizes a specific formula to determine your effective collectability, based on your:
- Assets and liquidity
- Reasonable expenses
- Number of dependents
If you try to undercut what they consider to be within your ability to pay, they will reject your offer. Note that while the offer is being considered (which can take weeks), your debt will continue to accrue interest.
While these offers used to require that a taxpayer pay what they can until the debt expires (10 years after the tax assessment date on which the debt was established, plus tolling periods), the IRS may allow you to pay off a significantly lower portion of your debt as part of the Fresh Start Initiative.
3. Filing as Currently Not Collectible
If you cannot pay monthly, and you cannot pay a reduced amount, then you likely qualify as a person under financial hardship. The IRS is obligated to avoid pursuing collection actions against a person under financial hardship, and you may file as currently not collectible.
With this type of IRS tax settlement, your debt isn’t wiped away, and interest will continue to accrue. But the IRS will not be able to file liens or levies against you until your financial situation markedly improves, which they verify periodically. You must continue to pay taxes and file your tax returns even if you are currently not collectible.
4. Penalty Abatement
The final form of IRS tax settlement is a sizeable reduction in your debt in the form of penalty abatement. Penalty abatement is usually reserved for first-time offenders, effectively wiping out your penalties and interest, so all that’s left to pay is the initial tax debt.
Don’t Fear the Tax Man
Regardless of what your situation currently is, the IRS is not out to harm you. They won’t knock down your door and demand the shirt off your back.
The worst thing you can do is nothing at all. Be sure to contact a tax professional and discuss your options immediately. The sooner you act, the less you have to pay – and the sooner this can be over.
Contact our team of tax professionals today.