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How to Negotiate a Tax Settlement with the IRS

how to negotiate a tax settlement with the irs

If you owe the IRS money, you may be able to negotiate a settlement in order to resolve the debt. This can be a tricky process, so you want to consider hiring a professional to handle the offer in compromise.

In this article, we’re exploring how to negotiate a tax settlement with the IRS.

How to Negotiate a Tax Settlement with the IRS

Tax debt is a serious issue. The government reserves special abilities when it comes to leveraging payment from indebted taxpayers, as their collection actions supersede those of most other creditors. When negotiating a tax settlement with the IRS, it’s important to create an offer the IRS is likely to accept sooner rather than later. 

There are very few ways around a debt with the IRS. The government expects you to pay them one way or another, and even in the most desperate cases, your best bet is to negotiate for a reduced debt rather than a full pardon. Working with experienced tax professionals is key, as the IRS can be particularly picky about tax debt settlements and won’t accept just any offer. 

Here’s how to negotiate a tax settlement with the IRS.

Negotiating a Tax Settlement with the IRS

When you owe back taxes to the IRS, you’re indebted to the government itself – and there are very few ways out of that debt. In some cases, taxpayers can argue that the debt they’re facing isn’t valid and argue doubt as to their own liability

When a taxpayer has definitive proof that they’ve been wrongfully charged, such as having the paperwork to back up a deduction the IRS rescinded, they may be able to negotiate a reduced or completely pardoned debt. 

But in most cases, a taxpayer’s debt to the IRS may be the result of simply missing a deadline, not making certain payments, filing late, or making a mistake on one’s tax returns. Upwards of 11 million Americans owe back taxes to the IRS, and these debts are often the result of hardship or life disruptions – from cancer to a messy divorce, or a global pandemic. 

When this debt gets out of hand, a taxpayer’s best bet may be an offer in compromise. An offer in compromise, with doubt as to collectability, allows a taxpayer to make the argument that they cannot feasibly pay off their debt before it expires, even when considering other options such as a long-term monthly payment plan, or a loan. 

Offers in compromise are reviewed by the IRS based on a taxpayer’s reasonable collection potential (RCP), and any offer that fails to match or exceed the IRS’s expectations of what a taxpayer should pay given their financial information, is likely to be rejected. 

Knowing how the IRS calculates and considers a taxpayer’s collection potential is critical for creating an offer they are likely to accept. It is a good idea to work with a professional when drafting your first offer, especially because the IRS continues to calculate and add interest to your debt while deliberating your offer. 

Getting an Offer in Compromise Accepted

Knowing your own RCP or having a good idea of what it might be lies at the heart of drafting a good offer in compromise. Your RCP is based on your monthly disposable income (any income after taxes and basic living expenses), and the quick sale value of any non-exempt assets and properties. 

In other words, the IRS uses any information you can send them, as well as information from third parties such as banks and employers, to determine exactly how much money you can afford to save up in a certain period, and how much you can secure by liquidating what you own, minus roughly one month’s worth of allowable costs.

If the IRS determines that the total cash value of your disposable income and net realizable equity over the next 24 months or the rest of your debt’s statutory period (whichever is less) is less than your total tax debt (including penalties and interest), and if it finds that your offer in compromise matches or exceeds this, the IRS is likely to accept your offer in compromise. That still doesn’t mean it’s guaranteed to do so but being as accurate as possible about your RCP improves your chances considerably. You can also use the IRS’s pre qualifier tool

Be Up to Date with Your Tax Returns

Drafting an effective offer in compromise is still just one part of negotiating a tax settlement with the IRS, albeit a crucial one. 

The IRS won’t accept any payment plans if you aren’t up to date with your tax returns and estimated tax payments (if you’re eligible), and it requires you to file your tax returns on time (and file tax returns that you’ve missed or forgotten for at least the last three years), even if you can’t pay your back taxes. 

Note that there are penalties for failing to file your tax returns, and that these can considerably impact and inflate your tax debt. Be sure to keep up to date with your returns and estimated payments, even if you can’t fully cover your debt. 

Alternatives to an Offer in Compromise

An offer in compromise can be an effective way to reduce what you owe, and help you get back into good standing with the IRS. But offers in compromise are not always necessary, when there are other, potentially easier alternatives. 

It’s important to remember that while an offer in compromise can let you pay less than what you ultimately owe, the IRS can be quite meticulous – and time spent investing in an offer sure to be rejected is ultimately time you could have saved by pursuing a different approach.  

Setting Up a Payment Plan

If you cannot pay your debt off in one go, and if your debt is less than $100,000 in combined tax, penalties, and interest, then consider a short-term payment plan. Short-term payment plans consist of multiple lump sum payments made within a total of 120 days, extendable to at most 180 days via phone or mail. 

If you need more than 180 days, and owe less than $50,000 in combined tax, penalties, and interest, then consider a long-term payment plan. Long-term payment plans involve monthly installment payments for up to 72 months, or your collection statute expiration date (CSED). Unlike short-term payment plans, however, there are certain setup fees associated with long-term payment plans. 

These can be reduced by setting up a payment plan online and opting for direct debit deposits rather than voluntary monthly deposits. Note that taxpayers qualifying as “low income” can waive their setup fees or seek reimbursement after the fact. 

Requesting Currently Not Collectible Status

When neither a payment plan nor an offer in compromise is in the cards, your best bet might be to just focus on fighting back against the IRS’s collection actions, until you can get back on your feet.

That is what the currently not collectible status is for. This status bars the IRS from pursuing certain collection actions against you (such as levies), and its validity is periodically reviewed, until your finances have improved enough to pursue a payment plan. Note that being currently not collectible does not remove a federal tax lien. 

Negotiating a tax settlement with the IRS can be a stressful and difficult process. It’s important to pick the right partners for the job, so you can put this chapter of your life behind you once and for all. 

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