What Is a Tax Settlement?

Tax Settlement

A taxpayer with an outstanding tax debt may arrange a tax settlement with a state taxing authority or the IRS to reduce the overall debt owed. Such settlements could become an option if circumstances prevent the taxpayer from paying a debt in full. Tax settlements do not apply to every situation, but it is a good idea for those who cannot pay their tax bill to ask about the possibility of the tax authority accepting a fair settlement. Factors determining the likelihood of a tax settlement being an option include the taxpayer’s extenuating circumstances and the most current tax laws and regulations. 

How Do Tax Settlements Work?

Those unable to meet their tax obligation may select another way to settle an outstanding bill over time or negotiate a payment for less than the original tax bill. Tax settlement programs come with qualifications that taxpayers must meet. Not all programs are the same; debtors must research all viable options to make the best choice before submitting the necessary forms. Some prefer to have a tax professional, like a lawyer who specializes in taxes, fill out and submit all required documents for them.  

Most tax settlements are between a single taxpayer and the IRS or another tax authority. But, debtors may bring in a third party for professional tax help and insight. Some law firms specialize in tax resolution, which is expertise that can help taxpayers reduce their overall costs. 

Usually, those who accept a tax settlement deal have a limited period to pay off their tax debt. During the settlement term, the tax authority does not add interest or late fees on top of the negotiated payment. While a person may pay the tax bill in a single lump-sum payment, tax authorities often allow for scheduled payments within a taxpayer’s financial means. After the individual settles a tax bill, the IRS deems that person in good standing for the specific tax year for a specific settlement. Sometimes, debtors fail to uphold their end of the agreement terms or default on the settlement.

Who Qualifies for a Tax Settlement?

Taxpayers experiencing financial struggles and those with legitimate reasons for not paying their tax bill qualify for tax settlements. Sometimes, debtors do not have the required income to meet settlement terms but apply for a program anyway. In these cases, the tax authority may reject the individual’s application and counter with an offer of accepting monthly payments.

What Are the Advantages of Accepting a Tax Settlement?

While seemingly advantageous on the surface, some may second-guess whether accepting a tax settlement is a good idea. One advantage of negotiating a settlement is that debtors do not have to worry about garnishments or liens. Tax authorities can place garnishment orders on a person’s paycheck, siphoning funds to settle outstanding payments. The IRS and similar authorities can place a lien on a debtor’s house or business. With liens, the person cannot refinance, sell or transfer ownership of the property as long as the claim remains.

The prior examples of garnishment may also have you wondering if your workers compensation wage is taxable.

Another benefit of tax settlements is that those who qualify for them pay less money than they would without the settlement. The longer a person waits to explore the possibility of qualifying for a tax settlement, the more the individual risks an unpaid bill accruing late fees, interest and other penalties. 

How Does an Offer in Compromise Work as a Tax Settlement?

Debtors can present a tax authority with an offer in compromise. This is an offer to settle the bill for less than the original amount. This should almost always be done with the help of a CPA or tax attorney. Often, tax authorities hesitate to accept such offers, but they may have no choice but to agree if an offer in compromise is the most favorable option for collecting a debt as soon as possible. 

Before agreeing to this tax settlement, the tax authority considers several factors:

  • The total value of the person’s assets
  • The person’s current ability to honor the offer in compromise
  • The individual’s financial obligations and expenses
  • Whether the taxpayer has an ongoing bankruptcy case
  • The debtor’s total income 

The IRS must also consider the taxpayer’s standing regarding current paying and filing requirements.

Applying for an offer in compromise requires paying a $150 filing fee and submitting an initial, non-refundable payment. There are two offer in compromise payment options:

  • Periodic payment, where the applicant pays a tax debt in monthly installments after making an initial installation 
  • Lump sum, where the debtor submits a retainer of 20% of the settlement amount before taking care of the rest of the bill in five payments or fewer

Just because a person applies for an offer in compromise and sends an initial payment is no guarantee of acceptance. If the tax authority rejects the offer, taxpayers can appeal the decision within 30 days. 

How Does Negotiating Back Payments Work as a Tax Settlement?

The IRS offers the Fresh Start program, which lets taxpayers pay off outstanding tax obligations. With this program, and all other options the IRS offers for negotiating back payments, civilians must act quickly to take advantage of the tax settlement program. That means filing taxes on time even without including a tax payment. Filing by the deadline reduces some penalties and fees. After filing, debtors can apply for an installment agreement that lets them whittle away at their outstanding bill with regular monthly payments. If the person predicts an improved financial situation, he or she can ask that the IRS temporarily halt collection efforts. 

Should a person indebted to the IRS successfully negotiate a back payment deal, making on-time payments becomes essential. Missing payments and failing to communicate with the IRS about missed payments may result in a suspension of the settlement agreement or the tax authority placing a lien on the individual’s house. 

Work With an Experienced Local Lawyer

Do you owe back taxes to the IRS or another tax authority? Do not wait a day longer to take action or request a tax settlement. Working with a local experienced and reputable legal advocate may boost your chances of negotiating a successful agreement. Submit a request online or call us today at (866) 345-6784 to get in touch with an experienced lawyer in your area!

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