If you find yourself overwhelmed with tax debt, a tax settlement might be your lifeline. Contrary to the common perception, the Internal Revenue Service (IRS) and state tax authorities are often open to negotiation. They would rather receive a portion of your owed taxes than none at all. It is through these negotiations that a tax settlement – an agreement to resolve your tax liability for less than the full amount owed – can be reached.

Understanding the Basics of Tax Settlements

A tax settlement is an agreement between a taxpayer and the IRS, or state tax agency, to satisfy tax debt for less than the full amount owed. These settlements are often the last resort for taxpayers who are unable to pay their tax debt in full due to financial hardship or extenuating circumstances.

The tax settlement process involves negotiation with the tax authorities, and it is often complex and time-consuming. Because of this, many taxpayers opt to hire tax professionals, such as tax attorneys or enrolled agents, to navigate the process on their behalf.

Available Tax Settlement Options

Depending on your financial situation and the details of your tax debt, several tax settlement options might be available to you:

Offer in Compromise (OIC)

Under this option, you may get the opportunity to pay less than what you owe the IRS to settle your debt. In order to prove that you qualify for this provision, you must demonstrate that paying your tax debt in full would create a financial hardship or would be unfair or inequitable.

Installment Agreement

An installment agreement is a payment plan that allows you to pay your tax debt over time. It can make repayment more manageable by breaking it down into smaller, monthly payments. 

Currently Not Collectible (CNC) Status

If you are experiencing severe financial hardship, the IRS may temporarily suspend collection efforts and categorize your account as Currently Not Collectible. During this period, you will not be required to make payments toward your tax debt.

How to Negotiate a Tax Settlement

Negotiating a tax settlement requires a thorough understanding of tax laws and IRS procedures, which is why many taxpayers hire tax relief companies to advocate on their behalf. If you choose to negotiate yourself, you will need to prepare by gathering all relevant financial information and demonstrating your inability to pay the tax debt in full.