What is an IRS Debt Settlement & How Can I Get a Good One?
If you’re having trouble Paying Off IRS Back Taxes, then it may be time to consider an alternative option.
In 2020, the IRS has made it abundantly clear that they are willing to work with taxpayers who’ve found themselves over their heads in outstanding tax debt, with a variety of IRS Tax Settlement options now currently on the table.
And since you’re searching for advice on the web, you’ve undoubtedly been bombarded by offers from IRS Tax Resolution Companies, but before you sign up for one of their expensive assistance programs, I recommend reviewing the material below to find out what you can accomplish on your own.
What Is IRS Tax Debt Settlement?
IRS debt settlement is similar to any other sort of legal settlement over a debt; it’s the process of negotiating with the IRS to pay them less money than they originally requested.
Typically, tax settlements result from a situation where the IRS has asked for more money than you could possibly afford to pay, especially since the IRS expects taxpayers to pay back all the money they owe in a single lump sum payment.
For many Americans, it’s simply not possible to accurately evaluate just how much they’ll owe in taxes until the actual tax bill arrives, and when that number comes in far higher than they’re able to afford, that’s when the IRS settlement process should begin.
Do I Need Help From A Tax Settlement Company?
The most difficult part about receiving a settlement with the IRS is that it requires significant negotiations with IRS agents, who are professional negotiators, expert investigators, and tenacious debt collectors; some of the most ferocious on the planet.
What’s worse about dealing with the IRS is that they have almost all the power in the situation, since they’re able to enforce any Collection or Enforcement Actions with the full power of the Federal Government, including literally arresting you and throwing you in prison for failure to pay your taxes.
Because of the potential for serious consequences, many people choose to pay tax settlement companies to negotiate with the IRS on their behalf, but several recent reports have investigated these businesses and found many of them to be severely lacking, both in terms of ethical considerations, as well as financial results.
If you do choose to hire a tax debt specialist to help you negotiate with the IRS, it’s extremely important that you shop around and make a good decision before agreeing to fork over hundreds to thousands of dollars for their assistance.
And before you even think about outsourcing the work, my recommendation is to review the material on this page, and throughout my site, to determine just how much you can accomplish on your own, and whether or not you’re up to the challenge of fighting it out with the IRS.
How Does The IRS Settlement Proces Work?
The bad news about getting a tax settlement from the IRS is that there’s no single, easy, streamlined and simple way to approach the negotiations process, but the good news is that you’ve got a variety of avenues to attempt before giving up on the effort.
The rest of this page will go through each of your options for pursuing a settlement with the IRS, explaining how the program works, what’s required, and how to go about pursuing the option.
I’m going to offer as much detail about each of these programs as possible, but if you have additional questions about any of them, from how they work to what’s required then please feel free to ask questions in the Comments section below at the bottom of this page.
When it comes to working on settling your debt with the IRS, there are 9 main avenues worth considering, including:
- The IRS Fresh Start Initiative
- The IRS Offer in Compromise Plan
- The IRS Partial Payment Installment Agreement Plan
- The IRS Currently Not Collectible Debt Program
- The IRS Statute of Limitations Expiration
- IRS Tax Debt Bankruptcy Discharges
- The Innocent Spouse Relief Program
- Removal of IRS Wage Garnishments
- Prevention of IRS Bank Account Levies
1. The IRS Fresh Start Initiative
The IRS Fresh Start Program has been around for many years, but was recently updated to help make it more easily accessible a wider population of Americans.
The way the Fresh Start Initiative works is that you ask the IRS for a reduction in total outstanding tax debt, either by getting them forgive some of the debt you owe, or by reducing the amount of fees, fines and penalties they’ve added to your debt.
To qualify for the Fresh Start Initiative, you have to prove to the IRS that the amount of money they’ve requested from you is more than you can possibly afford to pay.
To convince the IRS that you can’t afford to pay them the amount they’ve asked for, you’ll need to show them your projected future earnings in order to prove beyond a reasonable doubt that you have no way of coming up with the money they want.
In return for proving that you simply cannot afford their demands, the IRS will reduce the amount of money you owe, and offer you an easier repayment schedule, typically extending the payments out over a period of several years, rather than requiring that you pay everything all at once in a large lump-sum.
For additional details on how to take advantage of this program, please see my page on the IRS Fresh Start Initiative.
2. The IRS Offer In Compromise Plan
The most widely published path to tax debt settlement with the IRS is their “Offer In Compromise” program, which allows you to request that the IRS write-off some of your tax debt, simply because you cannot afford to pay it.
If you’ve ever heard anyone talking about receiving IRS Tax Debt Forgiveness, then it’s likely that they were referring to the outcome of the Offer in Compromise process, as this is by far the most popular way to reduce your tax debt liabilities.
The Offer in Compromise Plan is real, and it’s not a scam, though you’d best be careful about outsourcing this work to a tax settlement company, because it’s possible to resolve this process entirely on your own, for free.
If you can convince the IRS to accept your Offer in Compromise, then your tax debt will be written down, or made easier to pay back, in one or more of the following ways:
- Reducing the original principal amount owed
- Reducing your fees, penalties or other added costs
- Reducing your interest rate accumulated on the back taxes
- Extending your repayment period to give you more time to come up with the money
The Offer In Compromise plan determines whether or not you’re eligible for some kind of financial assistance by reviewing your specific financial situation, and especially, by looking at the following four factors:
- Your ability to pay the outstanding tax debt, penalties, fines, fees and interest that the IRS has demanded
- Your current annual income (and projected income for the next several years)
- Your current expenses (and projected expenses over the same time period as above)
- Your equity in any assets you may own (like businesses, real estate, stocks, bonds or other investments)
The way to qualify for an IRS settlement under the Offer In Compromise Plan is to make the IRS think that there’s no way you could possibly afford to pay back whatever amount of money they’ve asked you to pay.
The worse off your financial situation looks, the better the settlement you’ll be able to achieve.
This is one of the reasons that many people with huge outstanding tax debts choose to pay a tax settlement company to handle the process for them; there are all sorts of tricks to making you look like you’ve got less assets than you really have, and someone who does tax settlement 40 hours per week is typically going to be better at it than someone who’s just spent a few hours researching the topic.
3. The IRS Partial Payment Installment Agreement Plan
IRS Partial Payment Installment Agreements are a way to reduce the impact of owing significant sums of back taxes, as they typically don’t reduce the amount you end up owning, but simply make it easier to pay back.
What is a “partial payment installment agreement”? It’s a contract that you negotiate with the IRS which lays out the terms of your back tax repayment schedule, typically, giving you several additional years to pay back whatever you owe.
Compared to having to pay all your tax debt in a single lump sum payment, the Partial Payment Installment Plan is far less demanding to people who are already facing difficult financial situations, which is why this plan is so popular for people looking to settle their IRS tax debt.
Like the Offer in Compromise Plan, you’ll only be able to qualify for a partial payment installment agreement if you can prove to the IRS that you’re literally unable to pay back whatever amount of money they’re trying to collect from you.
And like the Offer in Compromise Plan, the worse your finances are, the more likely you’ll be to be able to negotiate a better tax settlement.
The amount of money you’ll be able to have written off, and the terms of your repayment schedule, will depend on how well you’re able to negotiate with the IRS, so be sure that you’re fully prepared to go to war with them before applying for an IRS Partial Payment Installment Agreement.
4. The IRS Currently Not Collectible Debt Program
This program doesn’t necessarily help with write-offs or debt reduction, but is more focused on extending the amount of time you have to pay back whatever back taxes you owe to the IRS.
If you can prove to the IRS that your outstanding tax debt is Not Currently Collectible, then they’ll offer you a sort of deferment, and put your tax payments on hold, typically for a year, or a series of years.
Anyone who’s ever relied on a Student Loan Forbearance or Student Loan Deferment will be familiar with the way that this program works, and all the same issues apply – typically, if you quality for the program, you won’t have to make principal tax payments, but you will start racking up interest on whatever amount of debt you owe.
One really nice thing about the Currently Not Collectible Debt Program is that it can be used as a delaying tactic for people who are facing IRS Collection & Enforcement Actions, like wage garnishments, tax liens or other penalties, as it gives you some additional time to work out your finances before those penalties go into effect.
Unfortunately, like all the other tax settlement opportunities, the outcome of your application will depend on your negotiation abilities, and specifically on how well you can convince the IRS that you simply can’t afford to pay them back.
If you’re the type of person who is comfortable with heated negotiations, complicated paperwork processes, and contentious legal discussions, it’d be a no-brainer to do it all yourself, but if you have trouble with any of these skills, then it may be in your best interest to bring in an outside expert who can handle the settlement negotiations for you.
5. The IRS Statute of Limitations Expiration
It may not be easy to qualify for a tax debt settlement and discharge via the IRS Statute of Limitations Expiration laws but it certainly is possible.
For those of you who are super-savvy operators, you’ll be pleased to find out that the IRS only gets 10 years to collect any debt that they’re determined they’re owed.
That means that from the point your tax return is officially filed (whether by you or the IRS on your behalf), the clock starts ticking, and that if you’re able to run interference on their collection and enforcement activities for a decade, you’ll be off the hook for whatever outstanding debt you owed.
Personally, I can’t imagine battling the IRS for a full ten years, and winning, because I know they like to make examples of tax holdouts (simply Google Wesley Snipes for details on how far they’ll go…), and that they’ve got no qualms about imprisoning anyone they’ve determined to be a “tax cheat”.
While it’s certainly risky business, nimble financial navigators will definitely want to investigate their options for delaying the IRS, and attempting to push any settlement negotiations away from being resolved in order to hit that 10 year deadline, and get a total and permanent tax forgiveness write-off.
If you do choose to pursue this IRS settlement strategy, then I highly recommend hiring an expert who has experience in this specific tactic. Why? Because things are going to be complicated, legally-confusing, and scary.
IRS Tax Debt Bankruptcy Discharges
It may not be easy to qualify for a tax debt bankruptcy discharge, but it definitely is possible, and this is perhaps the most powerful way to settle your IRS debt.
Because if you can convince a court or judge to discharge your IRS tax debt, then you get to move on with life, free and clear, without having to pay back a single cent.
Now – it’s more likely that you’d get the court to agree to discharge some certain percentage of your debt, but even that would be an outstanding victory over the IRS, and one that’d be difficult to replicate via the other settlement opportunities outlined on this page.
It’s possible to discharge IRS debt via either Chapter 7 Bankruptcy, or Chapter 13 Bankruptcy, and your specific financial situation will determine which route holds the most opportunity for you.
If you choose to pursue a Chapter 7 tax debt bankruptcy discharge, you’ll be eligible to have 100% of your outstanding debt forgiven with the stroke of a pen, but it’ll be a lot harder to win in court.
If you choose to pursue a Chapter 13 tax debt bankruptcy discharge, then you’ll only be eligible to have a portion of your tax debt forgiven, but it’ll be far easier to win in court (because the requirements are far more relaxed).
This is one IRS debt settlement strategy that I would insist requires the help of an outside agency, either from a tax settlement expert, or an attorney with tax-related experience.
You simply do not want to enter Bankruptcy court without an expert on your side, because the IRS knows how to handle these cases, and it’s going to take some fancy legal wrangling to win in a court of law.
We’d all like to think that the legal playing field is entirely level, but do you really think you’re on equal footing with the IRS, who is responsible for collecting the money that pays the judge’s salary?
The Innocent Spouse Relief Program
Now we’re really stretching, as this particular tax debt settlement program is only going to be an open for people in very specific situations.
However, if you should find yourself in a marriage (or recently having left one), where all your IRS debt, penalties, fines, and other enforcement actions were the result of something your no-good spouse did, then I’ve got great news!
You could qualify for total tax debt forgiveness, by agreeing to help the IRS go after your spouse (or if we’re being honest here, your former spouse).
This may require turning over paperwork, testifying in depositions, or even attending a trial where the iRS pursues your spouse (read: ex-spouse) and attempts to stick them with all sorts of blame for the tax debt the two of you accumulated.
And while this is a niche opportunity that only few people will be eligible to pursue, you’d be amazed just how many people actually DO take advantage of the program each year.
They say that financial problems are the leading cause of divorce, so perhaps that explains it entirely.
Either way, if your spouse was up to something shady, or simply refusing to responsibly handle his or her tax liabilities, then you may be able to take advantage of their evil ways and reach a great settlement with the IRS.
Removal of IRS Wage Garnishments
If you’ve been battling with the IRS for months (or years), then you’re probably familiar with the concept of wage garnishments, but for those who haven’t yet reached this stage of the enforcement and collection process, here’s how they work:
Once the IRS decides that you have no interest in attempting to pay them whatever they’ve demanded, they’ll simply contact your employer and alert them that some portion of your paycheck must be redirected their way.
Instead of receiving your regular paycheck amount, you’ll get the regular amount, minus whatever the IRS has determined they can legitimately collect.
In many cases, wage garnishments are virtually impossible to defeat, as the IRS doesn’t necessarily have to follow stringent legal guidelines when deducting money from your paycheck, and can pretty much do as they please.
However, if you’re able to prove that their garnishment withdrawals are significantly impacting your ability to live a normal life (by hurting your ability to pay for basic life necessities, like food, shelter, clothing, etc.), then you may be able to get a judge to release the wage garnishment, and put the IRS enforcement and collection actions on hold.
As I mentioned above, this process isn’t all that easy, but because it is possible, I wanted to point it out as an avenue worth exploring.
Keep in mind that this is another of those processes which you should probably bring in outside counsel to assist with, and in this case, I’d absolutely only consider paying someone who’s already managed to successfully remove wage garnishments from previous clients.
Make sure that whoever you end up paying to attempt to release your wage garnishment can prove that they helped out some previous clients; get them to provide the paperwork, a referral phone number or email for the previous client, and make sure to followup with that person to ensure everything this so-called expert told you is true.
Prevention of IRS Bank Account Levies
On the flip side of the coin from the release of wage garnishments, another important tax settlement strategy is preventing bank account levies from going into effect – before they’ve been approved.
How could you prevent a bank account levy from the IRS? You’ll need to prove to a court that the money they plan on taking from your account will significantly impact your quality of life, leading to dangerous consequences.
You’ll need to prove all sorts of accounting information, including outstanding balances, the value of all your assets, your current and projected future annual income, and other details, but keep in mind that everything only has to look bad on paper for you to get your approval for a stay.
This is especially important for people who are able to do some creative accounting, and essentially hide some of their assets or income to present a less-than-pretty picture of their financial situation.
Unfortunately, this is another one of those complicated, legal-leaning settlement opportunities that’ll probably require paying someone else for assistance.
What Should You Do?
That’s a good question, and I wish I could help, but this is where your brain has to enter the equation and do the math for yourself.
The best way to determine your next step would probably be to consult with an expert, whether or not you agree to pay them to do the work on your behalf.
In fact, my advice to anyone attempting to settle their IRS tax debt is to consult with as many IRS debt settlement companies as possible, since it’s likely that you can milk them for some information about how best to proceed.
I would highly advise that you start contacting some tax settlement professionals to find out what they think about your situation, and to see if you can extract any advice about what you should do next.
Be careful about who you choose to talk to, and about what you say, and be sure that you don’t sign anything unless you’re completely confidant that the debt settlement company will be able to save you more money than they’ll charge (try to get a guarantee of that in writing!).
Where Can I Go For Other Questions?
To get effective IRS Debt Relief, be sure to check out some of the other pages of my site, where I cover all sorts of relevant topics like debt forgiveness and debt settlements in detail.
You’ll certainly want to check out my Guides on IRS Tax Penalties, IRS Back Taxes, IRS Debt Forgiveness, IRS Debt Settlements, IRS Debt Resolution Services, the IRS Collections Process, and the IRS Fresh Start Program.
You also may want to consider reading the IRS Taxpayer Bill of Rights, which will outline exactly what the IRS and their private debt collection agencies are allowed to do to try and get you to pay back your debt.
And if you have any other questions about the IRS tax debt settlement process that weren’t answered in this page’s text, please feel free to ask them away in the Comments section below.
I promise I’ll do my best to get you a response quickly.
Disclaimer: Information obtained from Forget Tax Debt is for educational purposes only. You should consult a licensed financial professional before making any financial decisions. This site receives some compensation through affiliate relationships. This site is not endorsed or affiliated with the U.S. Department of the Treasury, the IRS or any other Government Organization.