Can I settle my IRS tax debt for less? That is a common question when confronted with a tax debt. The short answer is: yes. However, not everyone is eligible for a settlement that will allow the taxpayer to pay less.
Read on to learn more about the options for paying less on tax debt, the requirements, and other essential IRS tax debt resolutions to know about.
Why You Keep Hearing “Settle Your IRS Debt for Pennies on the Dollar”
You may have heard commercials from tax relief companies with “too good to be true” offerings like “settle your tax debt for pennies on the dollar,” “we can wipe out your IRS debt,” and “guaranteed tax relief.” These marketing phrases are frequently oversimplified, misleading, and inaccurate.
It’s crucial to note that while settlements exist that result in paying down your debt for less, not everyone qualifies, and the IRS has strict rules and formulas.
Therefore, if you see offers that promise quick fixes for complex tax issues, be cautious because no results can be guaranteed. Many intricate factors come into play, influencing the outcome.
Wiping out your IRS debt is also certainly not a straightforward process. You need to pass strict requirements, such as providing extensive financial documentation to show whether full payment would cause undue hardship, filing all tax returns, and more.
The Legitimate Way to Settle for Less: What Is an Offer in Compromise?
Can I settle my IRS tax debt for less than I owe? Yes, if you qualify through a legitimate way, such as an Offer in Compromise.
An Offer in Compromise (OIC) is an IRS program that allows qualified taxpayers to settle tax debts for less than the full amount owed. The option is designed for people who truly cannot pay the full debt and/or would face serious financial hardship if forced to pay in full.
Who May Qualify for an Offer in Compromise?
Basic requirements that must be met include:
- Having filed all required federal tax returns
- Having made all required estimated tax payments for the current year
- Not in an open bankruptcy proceeding
- Having received a bill for at least one tax debt included in the offer
- And if an employer has made all required federal tax deposits for the current quarter and the prior two quarters.
The IRS may approve an OIC application if the amount offered equals or exceeds your Reasonable Collection Potential (RCP), which is the maximum amount the IRS believes it can realistically collect from you.
In calculating the RCP, the IRS uses a detailed financial analysis (such as Form 433-A and Form 433-B) that includes looking at one’s assets, income, future potential income, expenses, and special circumstances, such as age, health issues, or exceptional hardships.
Most OICs are accepted based on Doubt as to Collectibility (when full payment is unlikely), with rarer grounds including Doubt as to Liability (a genuine dispute over the debt amount) or Effective Tax Administration (where complete collection would cause economic difficulty or be unfair due to exceptional circumstances).
When You Likely Do Not Qualify for an Offer in Compromise
An OIC is specifically designed for those facing hardship and genuinely unable to pay their tax debts. Therefore, if you have proven, using the RCP method, that you can pay the debts, or can opt for other methods such as an Installment Agreement, your application will most likely be rejected.
Other instances where the chance of rejection is high are if you do not qualify for the basic requirements, such as having not filed all required tax returns, and in open bankruptcy proceedings, or you have sufficient assets to pay off and have no economic issues or other exceptional circumstances.
So, can everyone settle their IRS tax debt for less? No. Only taxpayers who cannot reasonably pay their full balance may qualify.
Other Legitimate Ways to Resolve IRS Tax Debt (Besides Settling for Less)
IRS Installment Agreements (Payment Plans)
An Installment Agreement is a program that allows taxpayers who owe taxes to pay off their debt in monthly installments.
An IA is beneficial in several ways:
First, paying the debt monthly helps manage debt and eases financial pressure.
Second, reaching an agreement with the IRS can prevent penalties such as levies and other legal troubles.
And finally, knowing that you’re paying off debts and preventing further issues provides peace of mind and reduces stress.
Currently Not Collectible (CNC) Status
Applying for a CNC status implies temporarily pausing active collection efforts such as wage garnishment and levies, due to proven financial hardship.
Unlike an OIC, however, a Currently Not Collectible Status does not make the debt go away, and penalties and interest continue to accrue. It is a program designated to provide a “breathing room” for taxpayers to halt collection actions while finding solutions to satisfy the debt.
Penalty Abatement and Other Relief
An abatement is a process of requesting a reduction or elimination of penalties and associated interests for non-compliance, not for tax debt. To be approved for a penalty abatement, such as the First-Time Penalty Abatement (FTA) and the Reasonable Cause Abatement, taxpayers must have a history of good tax compliance and reasonable cause, which they can show by demonstrating they tried to comply but couldn’t due to circumstances beyond their control.
Other relief includes IRS administrative relief, which reduces or removes penalties due to special circumstances, such as a natural disaster or a pandemic, such as COVID-19, based on internal policies, without requiring the taxpayer to prove any justification.
How to Tell If Settling for Less Is a Realistic Option for You
If you are considering an OIC because you owe taxes, the best approach to determine whether it is the correct decision is to take an honest look at your financial situation.
Can you afford to pay your taxes? Even if not in whole immediately?
For example, paying off through other legitimate ways we have discussed above. If so, an OIC is not the best option, as your application would most likely be refused. The IRS will assess your finances and ability to pay using the Reasonable Collection Potential. Therefore, it is better to save time and energy by pursuing other options that have a better chance of achieving an ideal outcome.
Furthermore, seek professional help from a tax attorney who can analyze your current financial standing and recommend the most effective strategy for dealing with your taxes.
Why Work With a Tax Attorney Instead of a “Tax Relief Company”?
So, why work with a tax attorney rather than a tax relief company?
For several crucial reasons. First, under IRS rules, tax attorneys have the full practice rights to negotiate settlements, handle audits, appeals, and other complex cases. Tax relief companies often rely on non-attorneys who cannot represent you in court.
Second, unlike tax relief companies that lack an attorney-client privilege, communication with tax attorneys is protected by law, preventing sensitive information from being disclosed to the public, including the IRS.
Third, tax attorneys are experts in tax law. They are trained in interpreting tax law and experienced in handling a diverse range of tax issues, providing tailored, highly strategic solutions for both basic and complex tax problems.
Lastly, attorneys are bound by the regulations of state bar associations and a strict code of conduct. Tax relief companies, on the other hand, frequently employ high-pressure sales tactics and make unrealistic guarantees, which are known to be ineffective, misleading, and inaccurate.
Worried About Your IRS Tax Debt? Talk to Greenberg Law Group, P.A.
If you are facing a tax issue, such as tax debt, call Greenberg Law. We can help you by looking at the situation realistically and offering tailored, transparent, and honest strategies.
We won’t promise you a guaranteed result, but we can promise you we will devise a course of action that is best for the challenges you are facing.
We understand all types of tax issues and have extensive experience in facing them. With the knowledge and skills we possess, we are confident that we can help you effectively navigate any tax problem you are facing.
Settling IRS Tax Debt for Less Than You Owe FAQs
Can I really settle my IRS tax debt for less than I owe?
Yes, but only in limited cases through programs like Offer in Compromise, and only if you meet strict IRS criteria.
How do I know if I qualify for an Offer in Compromise?
You must demonstrate that you cannot reasonably pay your full tax debt based on your income, expenses, and assets. A tax attorney can help evaluate your eligibility.
What should I do before I pay anyone to “settle” my IRS debt?
Get a professional opinion from a qualified tax attorney who will review your situation, explain your options, and give you an honest assessment.
