If you owe money to the IRS, you may be interested in negotiating a smaller payment. This can help save you money as you resolve the debt.
In this article, we’re taking a look at one of the most common questions we receive – can you negotiate a settlement with the IRS?
Can You Negotiate a Settlement with the IRS?
The IRS, perhaps more than any other kind of creditor or collection agency, will aggressively pursue the assets and income of anyone with outstanding tax debt. They have the means and the power to resort to measures other creditors could only dream of – which is why many rightfully fear getting on the wrong side of the IRS.
While the IRS doesn’t have the manpower or the resources to go after the entire country’s back taxes, it does try to collect where it can – and as with any large and bureaucratic body, this can sometimes result in situations where a debtor is faced with unreasonable demands and a bleak financial future.
Thankfully, it is the IRS’s self-professed mission to carry out their duties and collect taxes “with integrity and fairness” and avoid completely crippling taxpayers. Depending on the circumstances and context of any given tax debt, there may be options at hand for a debtor to correct the amount of taxes they owe, appeal an audit’s results, or argue for a reduction in fees and penalties. The IRS is not a monolithic or omnipotent entity – they make mistakes, and there are checks and balances in place to correct these mistakes.
So, can you negotiate a settlement with the IRS?
Does the IRS Ever Settle?
Yes. The U.S. tax court exists to provide the setting for taxpayers to appeal a notice of deficiency (CP3219A/CP3219N), determination (CP508C), and other notices. While it is exceedingly unlikely to wipe out your tax debt, the IRS is ultimately in the business of collecting revenue from taxpayers. If you have the evidence and the means to go to court to appeal any notice or sue the IRS, there is a chance that they will settle.
However, this is by no means an easy or simple process. You have 90 days from the date on the notice you have received to file a petition, and there is a $60 filing fee.
And it certainly is not available to everyone who owes taxes to the IRS. This is an option in cases where you may have received a notice that doesn’t reflect the truth and wish to petition for an appeal. Depending on the size of your debt, it can take a long time before your petition and case are seen and ruled on by a judge.
Should you find yourself in a situation where the IRS has made a mistake or you wish to appeal a tax decision, you can take your complaint to the IRS’ Independent Office of Appeals, or if your appeal was rejected by the tax court, you may take the decision to a Court of Appeals (unless it was a small tax case, an expedited process for debts of $50,000 or less). Before deciding how to appeal, it’s best to contact a tax law professional.
Generally speaking, the IRS does not budge much in cases where you do owe taxes and are able to pay them. It can, however, be flexible in how they’re paid, and may offer certain adjustments to help you pay your taxes, especially if it is not within your means to pay them within a reasonable timeframe. In cases where circumstances make it impossible for you to cover your tax debt, you could file for an offer in compromise.
What is an Offer in Compromise?
First, an offer in compromise is not available to everyone with severe tax debt, and the IRS considers it something of a last resort. It represents an appeal to the IRS for a reduction of the outstanding debt on the basis of your income, ability to pay, current expenses, and asset equity.
The IRS may consider an offer in compromise “when the amount offered represents the most we can expect to collect within a reasonable period of time.” It is important to note that the IRS will immediately reject any filed offer in compromise if you have not filed all required tax returns and have not paid estimated tax payments that you are eligible for.
The IRS has its own pre-qualifier to help taxpayers understand if they may be eligible for an offer in compromise, but it also helps to approach a local tax professional to get a clearer picture of what may be required in your specific case.
Requirements for submitting an offer in compromise will depend on whether you qualify for the low income certification. Individuals who do not qualify must send in an offer in compromise with an application fee and an initial payment, either in lump sum form or as part of a periodic payment.
If your offer in compromise is rejected, you have a month to file for an appeal through the IRS’ Independent Office of Appeals. This is separate from the US tax court.
What If You Know You Cannot Afford Your Taxes?
If you are in dire straits and cannot afford to pay your taxes, you should still make sure to file a tax return. This is because the IRS piles on additional fines and penalties for failure-to-file, which are separate from failure-to-pay penalties.
Even if you cannot pay, it is within your best interest to continue to file your tax returns on time, and declare any eligible income and revenue, as well as any business-related losses.
The first thing the IRS will offer is an extension to pay. Depending on the extent of your debt, they may offer the option to pay in installments. And if you can prove that do not possess the means to cover your debt, you can reduce it somewhat via an offer in compromise, should you be eligible.
What to Expect When Negotiating a Settlement
It’s important not to have any special expectations going into an appeal. The IRS and other organizations warn of any uncredited or disreputable businesses that aim to woo debtors with promises of extraordinary settlements, or a guaranteed drop in debt.
Whether the IRS settles or whether you ultimately qualify for a reduced debt depends on individual circumstances that cannot be covered in a single article. It is important to note, however, that no matter your circumstances, there are multiple avenues for dealing with an erroneous notice from the IRS, or a tax debt.