A tax settlement, also known as an “Offer in Compromise” (OIC), is an agreement between someone and their tax authority that allows that person to pay off their debt for less than the original amount owed. The tax authority could be the Internal Revenue Service (IRS) at the federal level or your state’s tax agency. This would depend on which type of tax is owed. These agencies might agree to a tax settlement if there are certain reasons to do so, including anything that makes it very difficult for a person to pay the full amount of debt owed within a reasonable amount of time.
Not every person who owes taxes and has difficulty paying is entitled to a tax settlement. However, tax agencies are usually willing to explore options with taxpayers and offer help. The factors that might make a tax settlement possible can also include tax laws or the financial stability of the taxpayer, but can also include health issues, job loss, or similar problems.
There are many reasons a taxpayer would want a tax settlement to resolve their debt. The biggest is that, if approved, you will pay less money than you originally owed, in some cases significantly less. This is a huge relief for many people who owe the IRS a large amount of money. Another benefit is that you can avoid the repercussions of not paying your debt, including liens or levies.
How to Settle with the IRS by Yourself
Want to hear the good news? You have options when it comes to reducing or completely eliminating your tax debt. Keep in mind, the IRS offers help called Offer in Compromise (OIC) if you’re unable to resolve your tax debt. The IRS can only collect a limited amount of money from you within 10 years.
It is possible to take matters into your own hands and try to settle your tax debt on your own. To do so, it is important to educate yourself on the process to make sure that you can get the best outcome. There are a lot of resources available to do this, for example, this online questionnaire can tell you first and foremost whether you qualify for a settlement at all. The application itself includes a non-refundable $186 fee. As discussed above, if you are approved for a settlement there are several ways that you can pay, either all at once or overtime. But make sure you understand whether you are paying more or less depending on the option you choose and base your choice on your preference with full understanding.
IRS Fresh Start Program – The Fresh Start program includes additional measures to assist those who owe a significant amount of money with varying ability to pay it back. Overall, these measures aim to reduce the burden on those who are trying their best to pay what they can within the system, by minimizing penalties and streamlining the process.
Tax Settlement Resources – There are several initiatives that exist to make the process of paying back taxes as easy as possible. It’s important to familiarize yourself with any resources available in order to take advantage of those that may be relevant to your situation.
IRS One-time Forgiveness – One-time forgiveness, also known as First Time Penalty Abatement, is when the IRS basically takes it easier on those who have made a mistake filing their taxes for the first time. This mistake could be filing a return or paying taxes late. In this case, if you have no other penalties from the last three years and are attempting to work out your error, the IRS may relieve your penalties.
Debt Forgiveness After 10 Years – While not heavily advertised by the IRS, there is an expiration for tax debt owed to a tax agency. After ten years, your debt is forgiven, however, it is not recommended to simply wait out that amount of time. Over ten years, debt collection tactics may become extreme, and it’s difficult to avoid these if you are not enrolled in any kind of payment or settlement plan.
How Much Will The IRS Usually Settle For?
The IRS decides on how much money you will owe by using certain types of criteria. This usually includes how much money you make and what your living expenses are, such as your rent or mortgage, food cost, transportation, and utility bills. Subtracting your living expenses from your income gives the IRS an idea of how much money is left over to pay off your debt every month – this is called cash flow. Monthly installments are preferable to most people. Depending on how quickly you can pay, the amount you owe could be either 12 or 24 times your monthly cash flow. The average amount that the IRS settles for is $6,629.
The IRS rewards those who are able to pay off the remaining debt more quickly, although it will allow you to pay over longer periods of time. However, if you choose to pay less per month over a longer period of time, you will likely end up paying more in total. It’s also important to note that of the many submissions for tax settlement the IRS receives every year, they only accept about 40%. While that statistic is not extremely encouraging, it shows there are a number of Offer in Compromise success stories every year.
Does Tax Settlement Hurt My Credit?
It’s important to know that while settling your debt with a tax agency is good because you will owe less money, it will likely impact your credit negatively. There are a number of reasons for this. In general, any difficulty paying off debt reflects poorly on your credit, and this includes tax debt. However, your credit and financial situation are much better off with a successful tax settlement in the long run than with unpaid debt or owed taxes.
There are a few ways you can reduce the negative impact on your credit. The faster you can reach a settlement, the better. If you don’t enter some kind of payment plan, the IRS could take further action that would be even worse for your credit, such as imposing a lien or levy which could put your home or car ownership in jeopardy.
Not acting fast will also make the tax agency less inclined to give you a better settlement when the time comes. To quickly prevent your tax worries, another option (a quicker option) is to work with our Tax Relief Experts available 24/7. All are standing by now to assist you with a free consultation.