Tax Settlement: A Comprehensive Guide for Financial Relief
9 MIN READ
Published October 19, 2023 | Updated November 09, 2023
The Internal Revenue Service (IRS) can charge interest and penalties when you fall behind your tax payments. If you still fail to pay your tax debt, the government may garnish your wages or place liens on your assets.
Fortunately, the IRS is often willing to consider tax settlement if you can demonstrate that you can’t afford to pay what you owe. You can pay your taxes in installments, request penalty abatement, or settle your debt for less than you owe.
What Is Tax Settlement?
Tax settlement is an acceptable agreement to the IRS that allows you to settle your outstanding tax debt for less than the amount you owe. If extenuating circumstances and extreme financial hardship prevent you from paying the full balance, the IRS can sometimes accept a settlement.
Individuals or businesses that can offer supporting documents that demonstrate that they do not have the means to honor their full debt while still paying for their living expenses may be eligible for tax settlement.
How Does It Work?
The IRS has a number of tax settlement programs, each with its qualification criteria. Once you’ve identified a program you’d like to apply for, you can submit the relevant forms to the IRS. You can settle with the IRS by yourself or work with a tax professional.
The negotiation will usually remain between you and the IRS, but you can include a third party if you prefer professional tax settlement services. You’ll need to pay off the entire settlement amount within a specified timeframe, during which no tax interest or late fees are added to your balance. You can pay off the entire settlement amount in a lump sum or set up a schedule of monthly payments.
Why Should You Settle?
Avoiding your outstanding tax balance is never a good idea. Other than tax levies, wage garnishment, and collection efforts, you can go to jail for not paying taxes if the IRS determines tax fraud. There are several benefits to negotiating a tax settlement.
You may pay less if the IRS accepts your settlement offer. If you meet the eligibility requirements, you may be able to settle your account for less than you owe. Once you pay the settlement amount, the IRS considers your account settled in full, so you won’t be subject to any penalties.
Another benefit is avoiding garnishments and tax liens on your assets and bank accounts. Once you settle your account, the IRS releases any federal liens it has placed.
What Are the Options for Tax Settlement?
Several tax debt relief measures are available to businesses and individuals, depending on the tax authority involved and your specific circumstances.
Offer in Compromise
Offer in Compromise is a special agreement you can make with the IRS to settle your tax debt for less than what you owe. To qualify, you must supply substantial information about your current liabilities, assets, and projected future income. The IRS only accepts the offer in case of exceptional circumstances, such as a serious illness that impairs your ability to provide for your family.
If accepted, you can pay 20% of your settlement amount upfront and pay the remaining amount over five months. You can also opt for periodic payments to pay off the settlement amount over 24 months.
The major benefit of Offer in Compromise is that you can lower your tax debt. The drawback is that it’s very difficult to qualify for this program.
If you can’t pay what you owe at once, you can negotiate a payment plan to settle your IRS tax debt over time. If you owe less than $100,000, you can opt for a short-term payment plan of 180 days or less.
If you have less than $50,000 in debt and need more than 180 days to pay, you can opt for a long-term payment plan with monthly installments. If you filed your return on time, the late payment penalty rate may be reduced while you’re on an installment agreement.
You can pay a setup fee and apply for an IRS payment plan online. The IRS may waive the setup fee if you're a low-income taxpayer.
Currently Not Collectible Status
Currently, Not Collectible (CNC) is a temporary option to stop IRS collection efforts if you cannot pay your tax debt due to financial hardship. When this status is in effect, the IRS stops wage garnishment, levies, and other collection attempts.
You can request a CNC status by calling the IRS at 800-829-1040. The IRS may ask for supporting documents and additional information to assess your case and will continue to review your financial situation each year until your situation improves. It’s important to note that unpaid taxes will continue to accrue late fees and interest even while your account has a CNC status.
If an Offer in Compromise is not an option, penalty abatement can significantly reduce your liability. The IRS can forgive penalties such as failure-to-file in some cases. If you owe taxes for multiple years and have accumulated a lot of penalties, penalty abatement can make a significant difference.
If you have received a penalty notice, follow the instructions in the letter to request the IRS to remove them. The IRS may be more likely to grant first-time penalty abatement if you’re an otherwise compliant taxpayer.
How To Settle Taxes in 3 Steps
Two main options for settling federal or state taxes are DIY and professional assistance. If your circumstances are complex, it’s best to seek expert advice instead of attempting to settle on your own.
1. Asses Your Tax Situation
Start by taking stock of your tax situation. Review your tax returns, notices, and letters you have received from the IRS to identify discrepancies or issues. Ask the IRS for a detailed statement of what you owe if you have any doubts.
Familiarize yourself with your rights as a taxpayer and the breakdown of the tax debt, income, and expenses. This will allow you to determine how much you can pay towards your debt each month.
2. Explore Settlement Options
Compare the settlement options available to you based on your circumstances. For example, if a significant portion of your outstanding balance consists of penalties, penalty abatement may be better than an Offer in Compromise. If you’re facing extreme financial hardship, you may qualify for OIC.
If you’re unsure which option to choose, consult a tax professional. They’ll be able to help you weigh the pros and cons of each option and suggest which program you may be able to qualify for.
3. Negotiate with Tax Authorities
Negotiating with tax authorities is not always easy or straightforward, but it can be done if you’re prepared. For example, you must fill out Form 433-A to provide accurate information about your income and expenses to determine a reasonable offer amount.
When negotiating with the IRS, presenting relevant evidence supporting your settlement offer is crucial. Without the right documents, the IRS will not likely accept your offer. You can also hire a tax settlement professional to negotiate on your behalf to improve your chances of a favorable outcome.
Alternatives To Tax Settlement
If you’re not eligible for any of the options listed above, other avenues exist to explore to pay your overdue federal tax.
- Apply for a personal loan and use the funds to pay off the full amount of your tax bill.
- If you have equity in your home, you may be able to get a home equity line of credit (HELOC).
- If you’re unable to get a personal loan or HELOC, you may be able to get a 401(k) loan to repay your tax debt.
When To Seek Professional Assistance
Hiring a tax attorney can be beneficial if you have significant back taxes, legal disputes, or complex issues. For example, Offer in Compromise is a complex form with a number of different sections that are best filled out by a professional.
Teresa Dodson, debt expert and founder of Greenbacks Consulting, recommends working with a legal professional. “If you need to settle your tax debt, you really should work with a tax professional to verify the correct amount owed, as sometimes the IRS makes mistakes,” Dodson says. These professionals can also help you determine what you can either qualify for or pay back,” she adds.
When hiring a tax relief company for settlement, ensuring they have sufficient experience is important. Most tax settlement companies charge a fee of $3,000 to $6,000, so it’s important to evaluate their success rate before hiring.
Settling Your Tax Debt
When you have accumulated tax liability, it’s important to promptly and diligently explore ways to settle what you owe. Ignoring your debt can lead to wage garnishment, penalty fees, and interest charges.
The IRS offers a number of tax relief options, such as paying a lump sum or affordable monthly installments. Consult with a tax professional to explore your options and resolve your tax issues effectively.