Tax Settlement: How to Settle IRS Taxes for Less than You Owe

When you haven’t paid your taxes, or you have a portion of taxes unpaid, the IRS will eventually begin their collection process. You most likely can enter into an IRS Installment Agreement (a form of settlement), which is a payment plan to pay your taxes over time or a series of payments (5 years usually). However, an Installment Agreement (Streamlined or Guaranteed) will result in the taxpayer paying more than they currently owe the IRS over the long run (because of interest).  Remember, before any settlement can be pursued, it is imperative that you first file your taxes. If you have not filed your taxes in years, there is a good chance the IRS filled out a “substitute return” for you, which means you will need to send the IRS an Amended return for the particular tax return year you want to fix.

Alternatively, although difficult, every taxpayer can attempt to “settle” their taxes for less than they owe. There are different ways to do this, each with varying degrees of difficulty.  Hence, a taxpayer may not qualify for every settlement option. The IRS usually will approve a settlement option if the taxpayer is struggling financially or can provide valid reasons why they didn’t pay and why, if anything, penalties and interest should be reduced or eliminated.

One way to settle for less than is owed is by applying for a Partial Payment Installment Agreement (PPIA) – and you need to owe the IRS 10k or more.  A (PPIA) is one of the newer IRS programs (enacted in 2004) where the IRS determines how much your monthly payments should be based on a Collection Information Statement (433A of 433B). Basically, Form 433 will show the IRS your total assets, income, and liabilities and is used to determine whether you qualify for a PPIA. Form 9465 also needs to be completed. The IRS may even tell you to use or sell equity in assets to satisfy part of your debt before a PPIA can be approved. Understand you are not going to be able to settle for less while at the same time holding onto major assets.  The reason a PPIA is a form of “settling for less than you owe” is because your monthly payments over a few years (varies) will not equate to your tax liability being paid in full.  With a PPIA, if you have basic accounting skills, you can fill out the Collection Information Statement but where you most likely will need professional help is computing the acceptable IRS monthly payment.

Another form of settling IRS taxes for less than you owe is through an Offer In Compromise (OIC). An OIC is usually rarely accepted (10-15% accepted) by the IRS (beware of individuals or professionals telling you it is easy) because the IRS needs to be convinced that it will cost them more money through further collection efforts/mechanisms.  In order to have your unpaid taxes compromised or to qualify for an OIC, a taxpayer must meet one of the three requirements below:

1. Doubt of Liability - You must prove to the IRS that there is doubt that the total amount owed is not correct.
2. Doubt of Collecting Liability – Proving to the IRS that the chances of paying back the total amount owed carries a low probability
3. Effective Tax Administration – The taxpayer acknowledges that the tax is correct and it can most likely be collected, however, the repayment of the total balance will result in extreme financial hardship for the taxpayer (senior citizens and individuals with disabilities can usually justify this). 

In most cases, when you submit an OIC to the IRS, it will need to be accompanied with a payment representing twenty percent of what you owe (it is not refundable if the IRS doesn’t not accept your OIC). In order to start this process, IRS Form 656/656-A will need to be completed along with a Collection Information Statement (IRS form 433A for individuals or 433B for businesses as discussed above).  If you decide to pursue this option yourself, just realize that it is highly recommended that you use a tax professional (CPA, Tax Attorney or the like) because most OIC’s are rejected because either forms were incorrectly filled out or requirements are not met.  A tax professional usually can make certain that you have a fair chance of getting an OIC accepted.

One other common way to reduce the total amount of taxes you are liable for is to abate your IRS penalties. Understand that penalties accumulate for each day past your payment due date. Penalty Abatement does not allow you to pay less than the principal balance or original amount you owe, just reduce or eliminate the penalties that have been added to your total balance. On average, penalties usually account for 15-25% of the total tax balance. Penalty abatement, unlike the other two common settlement options above, is a much easier to obtain. The IRS stresses or uses penalties and interest as a means to incentivize taxpayers to paying sooner than later. A taxpayer should pursue Penalty Abatement if they feel they are liable for taxes, but not responsible for the IRS penalties. Usually you want to have a reason that illustrates unforeseen events caused you not to comply (you didn’t pay or file).  Some common reasons the IRS will sometimes accept are:

1. Divorce
2. Family Death
3. Destruction of Home or Personal Records (hurricanes etc)
4. Severe Illness
5. Unemployed for an Extended Period of Time

In order to pursue IRS Penalty Abatement, you can send a letter to the IRS stating your case as to why you feel you should not be responsible for penalties incurred, visit an IRS office for an interview, or you can request it by using IRS Form 843 - being certain to follow all directions on the form.

The above illustrate a few common ways to settle back taxes or unpaid IRS taxes for less than you owe. If you are not approved for any of the settlements above it is because you did not file your taxes first or you do not meet the requirements of that particular form of tax settlement. It is recommended when trying to settle IRS taxes owed that a taxpayer reach out to a professional firm that offers tax settlement services and is comprised of CPAs and/or Tax Attorneys. Tax professionals provide guidance as to what settlement method is the best to pursue and they can also increase the likeliness of an IRS acceptance  because they can make sure forms and procedures are completed and followed correctly.