Tax Negotiation & Tax Settlement
A tax settlement is an arrangement which is acceptable to the IRS or state taxing authorities that allows a taxpayer to retire an outstanding tax debt for less than the original amount owed. Taxation authorities sometimes allow this type of tax settlement when extenuating circumstances exist that would prevent the taxpayer from honoring the full debt. While not every situation is appropriate for engaging in a tax settlement process, individuals who owe taxes often find that tax authorities are willing to explore the individual situation to determine if a tax settlement is possible. This is typically based on current tax regulations and the circumstances of the taxpayer.
There are several benefits associated with attempting to negotiate a tax settlement.
- Pay Less Now – The most obvious is that the taxpayer ultimately pays a considerably lower amount of money to the tax authority. Assuming that the situation of the applicant meets certain qualifications, a tax settlement amount may be determined and presented within a very short period of time. Once the balance is paid based on a mutually agreement, the account is considered settled-in-full, meaning that the taxpayer is no longer subject to late fees and other types of penalties that would be incurred otherwise.
- Avoid Liens and Garnishments – Another benefit of a tax settlement is that the taxpayer avoids the placement of tax liens on a home or business, a bank levy on one or more available accounts, or the implementation of a wage garnishment on his or her paycheck.
The IRS will allow a taxpayer to either negotiate a tax settlement for less than the total amount owed or come to an agreement on another method for the IRS to collect taxes owed over time. For either of these situations the taxpayer must meet the qualifications of one of the tax settlement programs set forth by the IRS. The taxpayer will first have to determine which type of tax settlement they would like to apply for and then submit the appropriate forms to the IRS for review before making a decision. A taxpayer can either fill out the information themselves or they can have a designated tax professional make the filing on their behalf.
Typically, the negotiation of the tax settlement remains between the individual and the IRS or tax authority involved and may include a third party if the taxpayer seeks professional tax settlement assistance. Firms that specialize in tax resolution can, surprisingly, also help to lower the costs to the individual, since there is typically a very positive outcome to seeking the assistance of a tax relief professional.
In many instances, a tax settlement calls for paying off the entire tax settlement amount within a specified period of time. During that time frame, no late taxes or tax interest is assessed on the balance of the tax settlement. Taxpayers may choose to pay off the tax settlement amount in one lump sum. If this is not possible, the IRS or tax authorities will set up a schedule of payments that are within the means of the taxpayer, with the last payment coinciding with the final date attached to the tax settlement offer. Once a settlement has been reached by both parties, the taxpayer will be considered good standing with the IRS for the tax year/years that the settlement covered (unless the taxpayer defaults or doesn’t hold up to all the terms of the agreement).
The IRS offers settlements to taxpayers that are struggling with their tax debts or have valid reasons to abate their penalties. Not everyone is eligible for tax settlement. In fact, most taxpayers are not eligible – only a narrow spectrum qualify.
The main factor the IRS takes into consideration when determining if the taxpayer will qualify for a tax settlement is their financial situation. If the taxpayer is undergoing financial hardship, it’s usually a good indicator to the IRS that a settlement might be a good option.
At the same rate, should the IRS or tax authority involved determine that the individual does have sufficient income to pay off the entire balance due over time, the tax settlement request may be rejected and instead, the IRS or tax authority will offer to accept monthly payments of a certain amount until the tax debt is paid off.