Tax Settlement – How To Settle With the IRS
The IRS realizes that there are special circumstances where taxpayers should not be held liable for all of their taxes owed. As a result, there are several ways to settle for less than you owe or to have your taxes forgiven.
To give you a sense of your options, this guide provides a general overview of the settlement programs and links to pages with more details on how to apply for each of these programs.
IRS Forgiveness Programs
There is no IRS program specifically labeled as a forgiveness program. But there are many different reasons that the agency uses to forgive tax liabilities.
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.
Through its penalty abatement program, the agency may also be willing to forgive penalties. You must apply for penalty forgiveness, and your chances of abatement are higher if you have reasonable cause and a history of compliance.
Tax Settlement Through an 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.
This program is not for everyone. The application process can be difficult, and there are strict qualification requirements. Basically, you must provide extensive financial details to prove that you cannot afford to pay the tax in full.
The IRS is not going to settle your tax liability for less than you owe if you have the resources to pay the tax. In most cases, the IRS will only accept offers that are equal to or greater than the amount the agency would be able to get through seizing assets, garnishing wages, or using other forceful techniques.
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 penalties can be up to 25% of the tax owed. If you owe $6,000, these penalties may have increased your tax liability to $7,500. This is just a single penalty for a single year. When you're dealing with multiple years and multiple types of penalties, the penalties can be even higher, making penalty abatement even more significant.
Penalty abatement is a very common method for settling taxes for less than you owe. In fact, about a third of all IRS penalties are removed at a later date. But you need to apply for abatement — the IRS generally doesn't remove penalties unless you request to do so.
Tax Settlement Through Partial Payment Installment Agreements
Through the partial payment installment program, you make monthly payments on your tax liability, and at the end of your payment term, the IRS erases the remainder of your tax liability.
Normally, when you pay off your taxes through an installment program, the IRS requires you to pay off the entire tax liability within a certain number of years or before the collection statute expiration date. After the expiration date, the IRS can no longer collect on the taxes.
A partial payment plan comes into play in situations where you cannot afford to make a monthly payment that will cover all of the tax liability by the expiration date. To help you out, the IRS agrees to accept a lower payment and settle the remaining balance at the end of the payment plan.
The IRS will only accept these plans if you prove that you cannot afford to pay a larger monthly payment. To establish that fact, you must provide a significant amount of financial details.
Why pay the taxes owed if they're just going to expire? Because setting up a payment plan stops the IRS from taking enforced collection actions like the seizure of assets, garnishing your wages, or taking your passport.
Using Innocent Spouse Relief as a Settlement Program
Innocent spouse relief is available to taxpayers who have filed jointly with their spouse or former spouse. Normally, both spouses are liable for all tax, penalties, and interest if they file jointly, but there are some rare situations where it’s unfair to hold both spouses liable.
To use this settlement option, 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 want to look into innocent spouse relief.
If you qualify, the IRS still holds the spouse liable, but you aren’t responsible. You are only responsible for the portion of the tax that is related to your income.
Settling IRS Taxes Through Bankruptcy
Bankruptcy can sometimes eliminate taxes owed. To eliminate taxes through Chapter 7 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, recent 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.
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. You can follow this guide on finding a trusted tax relief company.
If you need help with unpaid taxes, the FTC says that the best option is to contact a local professional. But, finding a local tax pro that specializes in tax resolution can be tricky when the big companies tend to be the most visible. At TaxCure, we have created a directory to help you.
Using our site, you can search for local tax pros in your area. Need high-quality, trustworthy help with IRS settlement services today? Then, search for a local tax pro with 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.