Tax settlement is an arrangement which is acceptable to the IRS or state Department of Revenue that allows a taxpayer to retire a tax debt for less than the amount owed. Taxation authorities allow this type of settlement when circumstances exist that prevent the taxpayer from honoring the full debt-including the inability to pay. Not every situation is appropriate for engaging in tax settlement, however, tax authorities are often willing to explore the situation to determine if a settlement is possible. This is typically based on current tax regulations and the circumstances of the taxpayer.
Benefits of an IRS Settlement via Offer-in-Compromise
There are several benefits associated with attempting to negotiate a tax settlement as follows:
- Pay Less Now:
The most obvious reason for settlement is the taxpayer pays a considerably less than what is owed. Tax settlement requests can be calculated and presented within a very short period of time. Once the settled balance is paid, the account is considered paid in full. All taxes and penalties!
- Collection Payments Stop:
If the tax settlement is with the IRS (called an Offer-In-Compromise) once the forms are filed, generally, no current tax payments that are payable on collection matters is required.
- Avoid Liens and Garnishments:
Another benefit of a tax settlement is that the taxpayer is viewed as working towards the resolution of his tax issues and generally, avoids the further collection action such as tax liens on a home or business, bank levies, or wage garnishment on his or her paycheck.
How Does Tax Settlement Work?
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 (partial payment installment agreement). In either case, the taxpayer must meet the IRS qualifications for the tax settlement programs. 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.
Who Is Eligible for Tax Settlement?
The IRS offers settlements to taxpayers that are struggling with their tax debts or have valid reasons to abate their penalties. Not everyone is eligible for a tax settlement. The main factor the IRS takes into consideration when determining if the taxpayer will qualify for a tax settlement is their financial situation. If the taxpayer is undergoing financial hardship, it’s usually a good indicator to the IRS that a settlement might be a good option.