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. In this article we will go over Eight IRS settlement options you have to negotiate your IRS tax debt based on what you can pay, and based on if the IRS assessed your tax correctly.
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 (Forms 433a, 433f of 433b).
Cons: It only works if you were audited and you have the records to support that you have good reason for not prevailing (or not showing up to) your audit. The process can take very long and you may need to appeal. The appeals process is also daunting and lenghty.
Option Two: Pay in full
Pros: This is the easier one, assuming you can pay in full. 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? People are often surprised to hear that you can successfully negotiate your tax debt down. There can be dangers to paying off the IRS as well.
Option Three: Penalty abatement
Pros: Penalties, especially payroll tax penalties, can easily spiral out of control. In some cases there is a significant saving to be had with penalty abatement.
Cons: For the most favorable penalty abatement the IRS may want you to full pay your obligation. For a lot of people, penalty abatement isn't appropriate — their history of noncompliance is too severe. It is not a magic wand that the internet may have you believing.
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 and there is limited time to repay. The IRS can be aggressive about how much money they want and you may default on your agreement. This leads to a bigger tax problem than you 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?
Option Five: Partial payment installment agreement
Pros: You pay the IRS an amount that you can afford each month. This is called a partial payment installment agreement. The amount will not full pay the debt in the remaining collection period (or CSED). 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.
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: You have to prove, beyond a shadow of a doubt, that you truly cannot afford to pay. The IRS will revisit your situation often as they are getting nothing from you. There is no final resolution until the CSED is expired. The IRS will intercept any refunds due to you.
Option Seven: Offer in Compromise
Pros: No mark against credit. This 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!
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.
Bonus Option: Innocent Spouse
Pros: If one spouse isn't responsible for the tax debt, they 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. If you would like to schedule a consultation so we can advise you on your situation, contact us.
