Tax Debt Settlement: How To Deal With The IRS

If you owe federal income taxes, withholding taxes, estate taxes or any other federal tax debt, it may be possible to negotiate a tax debt settlement with the IRS. There are two tax debt settlement options available to taxpayers who owe federal taxes:

Installment Agreements; and
Offers in Compromise.

What is an Installment Agreement?

An installment agreement is an agreement between a taxpayer and the IRS which allows the taxpayer to make monthly installments until the taxes have been paid in full. During the period of the installment agreement, interest and penalties will continue to accrue.

A taxpayer who owes $25,000 or less in combined taxes, interest, and penalties can use the online payment agreement form which can be completed online at http://www.irs.gov/individuals/article/0,,id=149373,00.html. In many instances, after submission of the online payment agreement application, the taxpayer will receive an immediate notification of approval. In other instances, a taxpayer may be required to send the IRS documents which support the information he submitted in the online payment agreement application. A taxpayer may also complete a Request for Installment Agreement Form 9465 and mail it in to the IRS.

A taxpayer who owes $25,000 or more in combined taxes, interest, and penalties must complete a Collection Information Statement, Form 433F and a Request for Installment Agreement Form 9465. These forms must be mailed to the IRS. After they have been reviewed, the taxpayer will be notified whether his request for an installment agreement has been approved.

What is An Offer in Compromise?

An Offer in Compromise is an agreement between the IRS and a taxpayer which allows the taxpayer to pay less than what he owes as a full payoff of the tax debt. The IRS will not agree to an Offer in Compromise unless the offer amount is equal to or greater than the reasonable collection potential. The reasonable collection potential is a measurement used to determine a taxpayer’s ability to pay the tax debt and includes the value that can be realized on all the taxpayer’s assets including real estate, vehicles, bank accounts, and other property.

To make an Offer in Compromise, a taxpayer must submit either:

Form 656, Offer in Compromise; or
Form 656-L, Offer in Compromise (Doubt as to Liability).

A taxpayer seeking an Offer in Compromise must also submit a completed Form 433-A or Form 433-B along with Form 656 or Form 656-L. Moreover, the taxpayer must remit the application fee and the first payment. A taxpayer should use the worksheet in Form 656-B to calculate the offer amount.

Getting Legal Help

The IRS will agree to an Offer in Compromise under very limited circumstances. Therefore, it’s important to consult with an experienced debt settlement attorney to determine if you qualify. A debt settlement attorney will also assist you in completing the paperwork, and, if you wish, can act as your authorized representative in all negotiations with the IRS.

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