Debt Consolidation

How to Negotiate a Tax Settlement

Posted on: March 24, 2010
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If you owe back taxes and want to negotiate a settlement with the Internal Revenue Service (IRS), understand that you'll need to be patient – it can be a lengthy process. You also need to understand that the goal of the IRS is to collect as much of the back taxes as possible in every situation.

Help and payment plans

To determine how much you owe, whether to forgive any tax debt, develop a payment plan, and otherwise work with you to make the tax debt more manageable, the IRS will examine your assets and income in detail. You'll also need to correctly fill out quite a bit of complicated paperwork. If you owe over $25,000, you are required to hire a tax professional to help you through the process, although you will often benefit from hiring one even if you owe less.

A tax settlement can be set up as a payment plan, which relieves pressure of having to come up with a lump-sum payment covering the entire tax debt owed. A payment plan can also prevent the IRS from placing a tax lien on your personal property, which could show up in your credit report and damage your credit rating.

Examine prior-year returns

The first step is to check your back tax returns and see if you can reduce your liability for any prior year. For any year you can lower your liability, file an amended tax return. Review your receipts, medical bills and deductions to make sure you claimed everything you qualified for in each year.

This process can not only reduce the amount of back taxes you owe, but lower it by a large amount. You'll need your filings and related paperwork from prior years, as well as the publications, instructions and other relevant information from each prior tax year.

Penalty and interest abatement

Part of your plan to negotiate a tax settlement can be applying to have the penalties and interest on your back taxes abated or canceled. This may happen if you can show that you acted in good faith. “Acting in good faith” essentially means you can establish legitimate reasons why you could not pay your taxes in the year they were due and that you did not attempt to cheat or mislead.

The IRS will look at extenuating circumstances, but you must be able to prove that they really existed. If the IRS finds that you do have reasonable cause, then the penalty and interest assessed on back taxes could be reduced.

Offers in Compromise

Sometimes, the IRS is willing to accept a lower amount that you offer as payment in full for the taxes you owe. This is called an Offer in Compromise. This method of negotiating a tax settlement lowers your liability and also lets you pay off the tax debt under an installment plan. Based on its track record in past years, the IRS is more likely to refuse these offers than accept them.

The IRS will examine your assets and your current and future potential income. If your Offer in Compromise is accepted, the IRS may only settle for an amount equal to the liquidation value of your assets. The liquidation value is the amount the IRS estimates it would get if it seized your assets and then sold them. If you have considerable assets, you may be better off working out a payment plan to pay off your back taxes in full.

Job loss

If you are unemployed and having financial difficulties, contact the IRS right away. You may qualify for various types of assistance and tax credits. In addition, the IRS could grant a hardship deferment, although this is only a temporary reprieve. The IRS will begin collecting again as soon as your situation improves.

Where to go for guidance

No matter how much is owed in back taxes and how complicated an individual's situation, it may be worthwhile to get help from a qualified professional. After all, most of us find that filling annual tax forms is complicated enough. Confronting more complex tax issues and even more forms and instructions at a time of high stress can be daunting. Tax settlement professionals have the knowledge and experience that can make a big difference in the outcome of your case.

The IRS has the required information available online, but it doesn't offer the perspective of a professional's experience in negotiating, appealing and handling the IRS. If you would like the help of a professional but feel you cannot afford one, there is a taxpayer advocate service available, which offers help at no charge and in confidence.

The Taxpayer Advocate Service - An independent agency within the IRS that has advocates in all U.S. States and territories who assist taxpayers with problems free and confidentially.

Tax Center to Assist Unemployed Taxpayers – Information on tax credits and options for tax payments for those who are experiencing financial hardship due to unemployment.

Every individual's tax and financial situation is different. You should consult with a qualified, professional tax adviser and financial adviser before making any decisions.