Tax Settlement – How To Settle With the IRS

A tax settlement is when the IRS agrees to let you pay off your taxes for less than you owe. The most commonly talked about IRS settlement is an offer in compromise, but there are a few other ways to settle your taxes. To help you deal with your tax debt, this post looks at the various types of tax settlements with links to more detailed resources, and then, it explains what tax settlement companies do and why you should work directly with a tax professional rather than a tax relief or settlement company.

Key takeaways

• The IRS may settle for less than you owe.
  • Offer in compromise - lump sum settlement for taxpayers who cannot afford to pay.
  • Partial payment installment agreement - monthly payments on a settlement, that may be canceled if your finances improve.
  • Innocent spouse relief - only pay your portion of the tax bill on a jointly filed return if you qualify.
  • Currently not collectible - get the IRS to stop collections and waive the bill if you cannot pay before the debt expires. 
  • Penalty abatement - reduce the bill by getting the IRS to remove penalties.
• Tax settlement companies promise to help you get settlements.
  • Be aware of their sales and marketing practices. 
  • Watch for big promises made before they understand your financial situation.
  • Consider working directly with a tax professional instead.

Offer in Compromise

An offer in compromise is when you settle taxes for less than you owe. The premise is simple: You offer to pay a certain amount of the tax liability, and the IRS decides if it wants to compromise. The IRS may be willing to settle taxes through an offer in the following situations:

• You cannot afford to pay the bill - This is called doubt as to collectibility, and to qualify, you must prove to the IRS that you are using most of the money in your assets and all of your disposable income to pay the tax bill.
• You do not really owe the full bill - This is called doubt as to liability, and in this case, you don't have to prove anything about your financial situation. You simply have to prove that you do not really owe the full bill. You should work with a professional because this argument requires extensive knowledge of the tax code and tax assessment procedures.
• Forcing you to pay the bill would be inequitable - This is called equitable tax administration. You will share information about your finances and ability to pay, but you will also explain to the IRS why paying everything that you could afford would be inequitable. For example, maybe you have a lot of equity in your home but accessing it would cause housing instability. Or perhaps you have a serious illness and need to retain some of your assets.

This program is not for everyone. The application process can be difficult, and there are strict qualification requirements. It's also important to note that the IRS may seize your tax refund the year you apply for a settlement, and you must stay compliant with all tax filing and payment obligations for the next five years or you risk losing the settlement.

Offer in Compromise Success Stories

While an offer in compromise is not for all taxpayers, it can provide stunning savings for the people who qualify. To show you how the process works in action, we collected offer in compromise success stories from some of the tax professionals who are part of the TaxCure directory. At TaxCure, we have the largest directory of tax professionals from around the country who specialize in helping taxpayers resolve tax problems.

Taxpayer Tip: When looking for help with your tax debt, look for tax professionals who have experience with offers in compromise and other settlements, but be wary of people who claim they can settle your tax debt before they know anything about your financial situation. 

Partial Payment Installment Agreement

Through the partial payment installment program, you make monthly payments on your tax liability, and at the end of the collection period, the IRS erases the remainder of your tax liability.

Here's how that works. The IRS only has 10 years to collect most tax debts, and normally, when you set up an installment plan, you must be able to pay off the total debt in monthly payments by the debt expiration date. However, if you cannot afford the monthly payments to do so, the IRS may be willing to approve a partial payment installment agreement or PPIA. Then, you make the payments you can afford until the collection expiration date, and on that date, the IRS settles the rest of the bill.

When you apply, you must share very detailed information about your finances just as you do with an offer in compromise, and for best results, you may want to work with a professional. Unfortunately, if you qualify, the terms aren't set in stone. The IRS will review your finances every two years. If your situation improves during that time, the IRS can demand payment in full or require you to make larger monthly payments. 

Penalty Abatement to Reduce Your Total Liability 

Penalty abatement is when the IRS forgives penalties. Even if the IRS doesn't reduce or settle any of the taxes, penalty abatement can help to significantly reduce your overall liability. 

For instance, failure-to-file and failure-to-pay penalties can each be up to 25% of the tax owed. If you owe $6,000, these penalties may have increased your tax liability to $9,000. If you qualify for penalty abatement on both penalties, you can save $3,000 plus the IRS will also remove any interest that accrued on the penalties. Even if you only qualify for relief from a single penalty, you can save $1,500 in this scenario.

The IRS provides first-time penalty abatement to taxpayers who have not incurred a penalty in the last four years, and the agency generally approves abatement requests for people who have reasonable cause such as death, illness, or disaster for incurring a penalty.

Innocent Spouse Relief

Innocent spouse relief is not a tax settlement per se, but if you qualify, this program can reduce your portion of a tax bill from a return filed with your spouse. If you live in a community property state, this program may be able to provide you with relief from a tax liability on a return filed separately from your spouse as well.

To qualify for innocent spouse relief, you generally must prove that you didn't know about the issue that created the tax liability and that you had no reason to know. For instance, if your spouse was hiding income and not reporting it, you may qualify. You may also qualify if you were coerced into filing a fraudulent return. 

Normally, when a couple files a joint return, they are both liable for the tax bill regardless of who earned the money. In contrast, if you qualify for innocent spouse relief, the IRS will only hold you responsible for your portion of the tax liability. Depending on the circumstances, you may need to be divorced, legally separated, or widowed to qualify. 

What Is a Tax Settlement Company?

A tax settlement company is a firm that focuses on reducing taxpayer's liabilities. Also referred to as tax relief companies, these firms traditionally engage in aggressive marketing that promotes the idea of settling tax bills for pennies on the dollar. Although settlements can be possible, you should always be wary of companies that make big promises before they understand your financial situation.

Unfortunately, some of the biggest players in the tax relief industry are more focused on sales than service. By extension when you contact these companies, you'll talk with a sales rep who will talk you into paying for their services, and you may ultimately discover that you don't even qualify for the settlement they promised. To help you out, here are several resources about what tax relief firms do, how to evaluate reviews of tax relief companies, and how to find the best help possible. 

• How to Find the Best Tax Relief Company 
• How to Spot the Worst Tax Relief Companies and Avoid Being Ripped Off
• Are Tax Relief Firms Legitimate?
• Tax Resolution Services Cost and Pricing
• Taxpayer's Guide to Tax Resolution Services

To ensure you get the best help possible, you may want to avoid the big settlement companies and work directly with a tax professional. Using TaxCure, you can search for tax pros based in your area, and you can filter the results to look for pros who have dedicated experience with the issue you're facing.

Tax Settlement FAQs

Can You Outrun the Collection Statute of Limitations?

Theoretically, you can avoid paying your tax bill if you outrun the statute of limitations on tax collections. The IRS only has 10 years from the date of assessment to collect your tax bill. However, it's important to note that there are several actions that toll and extend this timeline, and in particular, being out of the country tolls the deadline. So, if you leave the country for 10 years, don't assume that your tax debt will be expired when you get back. In most cases, it is easier to address your tax debt than to wait out the IRS. 

That said, if you genuinely cannot afford to pay your tax liability, you may want to apply for currently not collectible status. If you qualify, the IRS will not bring any collection actions against you (unless your financial situation improves). If you maintain this status until the collection statute expires, you will not need to pay the tax liability. 

Can You Settle IRS Taxes Through Bankruptcy?

Bankruptcy can sometimes eliminate taxes owed. Generally, to eliminate taxes through bankruptcy, the taxes must be at least three years old and they must be state or federal income tax. You cannot use bankruptcy to erase newly assessed taxes or most non-income taxes such as payroll taxes.

If you're solely considering bankruptcy to discharge taxes, it is probably not the best option. It negatively impacts your credit and may require you to liquidate assets. However, if you're also struggling with a lot of consumer liabilities on top of unpaid taxes, this may be something to consider. Contact a bankruptcy attorney to learn more or talk with a tax professional about your options.

Can You Do a DIY Tax Settlement?

You can negotiate directly with the IRS. You do not have to hire a tax professional. In many cases, taking care of the issue on your own is advantageous because you don't have to pay anyone to help you. However, before trying to deal with the IRS on your own, you should make sure that you understand the problem and how the resolution process works.

If you want help, a tax professional can guide you through the negotiation/settlement process. Their experience and guidance help to ensure that you get the best results possible. They often know how to work the situation to your advantage in ways that a lay taxpayer wouldn't understand. Working with a tax pro can also give you a great deal of peace of mind. 

Are There Really IRS Forgiveness Programs?

There is no IRS program specifically labeled as a forgiveness program. However, there are many different reasons that the agency uses to forgive tax liabilities including offers in compromise, partial payment installment agreements, and penalty abatement. 

Keep in mind that the IRS does not easily erase taxpayers' liabilities. But when special situations apply such as extreme financial hardship or someone who was unaware of their spouse's actions, the IRS may be willing to forgive some of the liability.

Get Help With Tax Settlement Services

If you are looking for tax settlement services for IRS or state taxes, you should contact a tax professional. They can analyze your financial situation and help you find the best option for your needs. Settlement programs are not available for everyone — the rules depend on your situation.

There are many tax settlement companies that advertise aggressively on the radio or TV. They claim they can reduce or eliminate your tax bill. In some cases, they can, but unfortunately, these companies are notorious for over-charging and over-promising what they can do. According to the Federal Trade Commission (FTC), you should be especially skeptical if a company promises that you can qualify for a certain program before looking at your financial situation.

Need high-quality, trustworthy help with IRS settlement services today? Then, search for a local tax pro with the experience you need. Using our site, you can search for local tax pros in your area, who have the experience you need.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.