Eight IRS settlement options that could save your skin
I think we’ll have to be honest here. Tax settlement companies have a pretty bad rap. The reason? Perhaps they don’t know exactly what they are doing, perhaps they are ethically challenged, and perhaps they prey on people’s emotions with fear-based marketing instead of empowering taxpayers with real information and giving them some IRS settlement options. Well, in this article we will go over Eight IRS settlement options you have to negotiate your IRS tax debt based upon what you can pay and based upon if the IRS assessed your tax correctly.
The Eight IRS Settlement Options:
IRS Settlement Option One: Audit reconsideration
Pros: The Audit Reconsideration settlement option has nothing to do with your ability to pay (in theory) so you do not need to file financial statements (433a, 433f of 433b). Cons: Only works if you were audited and you have records to support that you have a good reason that you didn’t show up or you didn’t prevail at your audit (whether field or “corr” audit). The process can take very long and you may need to appeal.
IRS Settlement Option Two: Pay in full
Pros: This is the easier one, assuming you can pay in full. And after payment, you may also set yourself up for a tax lien withdrawal, which will wipe out the existence of a tax lien Cons: Who wants to pay the IRS in full? And there are dangers to paying off the IRS as well.
IRS Settlement Option Three: Penalty abatement
Pros: Penalties, especially payroll tax penalties can spiral out of control, so in some cases there is a significant saving to be had with a penalty abatement. Cons: For the most favorable penalty abatement, the IRS may want you to full pay your obligation. And for a lot of people, penalty abatement isn’t appropriate — their history of noncompliance is too severe. So it is not a magic wand that the internet may have you believing.
IRS Settlement Option Four: Full payment Installment agreement
Pros: A full payment Installment Agreement allows time to pay a debt and avoid levies and garnishments. You can request a lien withdrawal once paid in full. Cons: Full financials are necessary for amounts over $25,000. The IRS may file a federal tax lien. There is limited time to repay. The IRS can be aggressive about wanting so much money a taxpayer will default on their installment agreement and wind up with a bigger tax problem than they started with. One of the sayings we have around here is: “Anyone can get into an IRS installment agreement.” But is it one that you can actually afford? Will it actually solve the problem?
IRS Settlement Option Five: Partial payment installment agreement
Pros: You pay the IRS something each month that you can afford. This is called a partial payment installment agreement. The amount will not full pay the debt in the remaining collection period (or CSED, as we call it in the biz). Once the CSED runs, the debt goes away! Cons: The IRS will revisit your situation every so often. That means someone from the IRS will call or a Revenue Officer will visit. If they think you can pay more, they’ll get it from you. If the CSED expires, and you have a balance, the IRS will not withdraw a lien, even though it is of no effect. The IRS will intercept refunds that may otherwise be due.
IRS Settlement Option Six: Currently non-collectible, hardship status
Pros: This is like the partial payment installment agreement, but even better as you are only required to pay $0 a month. While in Currently non-collectible status, the CSED could pass and you may wind up paying $0 to your entire tax debt Cons: The IRS will revisit your situation closer as they are getting nothing. There is no final resolution until the CSED is expired. But at least the IRS isn’t collecting from you. The IRS will intercept refunds.
IRS Settlement Option Seven: IRS settlement offer in Compromise
Pros: No mark against credit. An IRS negotiated settlement allows a taxpayer to wipe out tax debts for a fraction of what is owed. Cons: In order for an offer to be accepted, it must be a good deal for the IRS. Crafting an Offer in Compromise that is a good deal for the IRS and a good deal for the taxpayer is an art form. Anyone can submit an Offer in Compromise. Getting one accepted that actually helps a taxpayer is the challenge. The IRS will also intercept the tax refund due the year after the offer was accepted and paid. A taxpayer must be in compliance for 5 years after acceptance otherwise the entire settled amount will be resurrected!
IRS Settlement Option Eight: Bankruptcy
Pros: It really works. Chapter 7 bankruptcy can discharge older personal tax liabilities. Rules are sometimes more favorable than other IRS tax settlement options. Cons: Doesn’t work on payroll taxes or newer tax debts. Bankruptcy is a mark against your credit. Liens may remain even though the underlying debt is discharged.
One more IRS Settlement Option: Innocent Spouse
Pros: If one spouse isn’t responsible to the tax debt, one spouse may be discharged entirely of responsibility. While it is common in divorce situations, a divorce is not necessary to prevail on an innocent spouse claim. Cons: If a spouse materially benefited from the non-payment of taxes, Innocent Spouse relief will be difficult to win. Note: This list is not legal advice, nor is it exhaustive of all pros and cons of every settlement option, but is meant to give you a basic understanding of the most common IRS settlement options.