Do you owe back taxes but can’t afford to pay the balance in full? You could qualify for a tax settlement with the Internal Revenue Service (IRS). Read on to learn how tax settlements work, the key benefits and how to determine if you’re eligible. You’ll also discover alternative forms of federal tax relief that may be available to you.
What is Tax Settlement?
A tax settlement is an arrangement between the IRS and the taxpayer to settle the outstanding debt for a portion of what’s owed. It’s referred to as an offer in compromise (OIC) and available on a case-by-case basis to taxpayers facing financial hardship.
How Does Tax Settlement Work?
In a nutshell, the taxpayer submits the required forms and documents to the IRS to request a settlement or hires a tax relief firm to do the legwork on their behalf. The latter is generally the better option as the OIC application process requires you to prepare and submit several forms that may be confusing to those without a background in taxation.
Here’s a list of the required forms you must complete and forward to the IRS to submit an OIC:
- Form 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals or Form 433-B (OIC) Collection Information Statement for Businesses
- Form 656 (Offer in Compromise)
Before the IRS considers your request, you also want to make sure your first payment is enclosed with the documents. You can choose from one of the following:
- Lump-Sum Cash Offer: Submit 20 percent of the settlement amount you propose. If the IRS approves your OIC, you will be required to remit the remaining balance in five or fewer payments.
- Periodic Payment Offer: Only remit a payment equal to the amount of all subsequent monthly payments proposed in your OIC.
Any errors or omissions can result in the denial of your application. The IRS will also want a compelling reason to approve your request for an OIC – if they believe you have the means to pay your back taxes in full, expect a rejection.
Who Is Eligible for Tax Settlement?
You could qualify for a tax settlement through an OIC if you’ve filed all legally required tax returns and are not actively involved in bankruptcy proceedings. The IRS also requires you to be current on mandatory estimated tax payments for the current year. If you’re a business owner seeking an OIC, you must be current on all federal tax deposits for the current quarter.
Beyond the general eligibility criteria, the IRS requires you to fall into one of these categories:
- Doubt as to Collectibility: The IRS has reason to believe your income and assets are insufficient and will prevent you from paying back taxes within the statutory period.
- Doubt as to Liability: The IRS failed to correctly interpret the tax code or review any evidence you presented, which resulted in your tax liability being incorrectly assessed.
- Exceptional Circumstances (Effective Tax Administration): You can prove to the IRS that you’re dealing with extenuating circumstances and paying your tax debt would be inequitable, unfair, or cause serious financial hardship.
It’s important to note that the acceptance rate for an OIC is relatively unimpressive. In fact, many individuals and businesses who try to navigate the complex process on their own face challenges and are often denied.
Consider hiring an experienced tax relief firm to help you determine if an OIC is a good fit for you. They can also assist you with the application process and ensure the required submissions flow through the proper channels.
What Are the Benefits of Tax Settlement?
There are several benefits of settling your tax debts. For starters, you could shield yourself from additional penalties, interest and avoid more severe collection actions like tax levies, seizure of assets, and wage garnishments. Some additional benefits to consider:
- You’ll likely pay far less than what you owe in back taxes, interest, late payment fees and other penalties.
- The IRS won’t pursue you for the forgiven amount once you satisfy the terms of the agreement.
- Future tax refunds will not be garnished once you’ve paid the settlement amount.
Other Tax Settlement Options
Having trouble getting approved for an OIC? Or maybe you’d prefer to explore other options? In that case, programs under the IRS Fresh Start Initiative could help you make tax debt a thing of the past.
Formerly known as the Fresh Start Program, this initiative made the OIC more accessible to distressed taxpayers. But if you don’t qualify for an OIC, an installment agreement could be an effective remedy to get a handle on your tax debt.
Installment Agreements
The IRS offers three installment agreements:
- Short-Term: available to taxpayers who owe less than $100,00 and can pay the total unpaid tax debt within 120 to 180 days
- Long-Term Payment Plan: available to taxpayers who owe $50,000 or less and can make monthly payments to repay the outstanding balance within 72 months; businesses could also qualify if $25,000 or less is owed and all tax filings are current
- Extended-Term Payment Plan: can be negotiated by a tax relief firm, and the terms are based on your income, expenses and liabilities.
What Are Tax Settlement Firms?
Also known as tax relief companies, tax settlement firms are for-profit organizations that help individual taxpayers and businesses resolve unpaid federal and state tax debt. They leverage tax relief programs offered by the IRS to help you effectively manage, reduce or eliminate your tax debt.
How to Find a Company to Settle Your Tax Debt
With so many tax settlement firms to choose from, how do you know which is best? Keep these factors in mind when reviewing your options:
- What states does the firm serve?
- Does the firm hold any credentials?
- Is it accredited by the Better Business Bureau (BBB)?
- What do past and current customers have to say about their offerings?
- Are consultations free?
- How many years of industry experience does the firm have?
- Are there enrolled agents on the team?
