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If you owe a significant amount in taxes and paying off the balance doesn’t look probable, you may qualify for tax settlement. 

Settling your back taxes enables you to have your tax debt erased for less than your original outstanding balance. Some states, like California, allow you to settle state-level taxes but this type of settlement is more common with the IRS, where roughly 24,000 taxpayers settled their federal income tax debt in 2018.

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How Can Tax Settlement Help Me?

An accepted back tax settlement doesn’t simply stop the collections process, most taxpayers will owe less than the original outstanding balance.

In 2019, over half a million federal tax lien notices were filed, up from approximately 410,000 in 2018. Liens on your home or business can be stressful and disruptive, even causing you to lose them. Bank levies can simply take what you have in the bank until your back taxes are paid. Tax settlement prevents this from happening.

In addition to preventing liens and levies, federal tax settlement also prevents your wages and other income from being garnished as it comes in.

How Does Tax Settlement Work?

For most taxpayers, federal tax settlement involves negotiating with the IRS to pay less than the total balance due based on their circumstances, but back tax settlement can also entail asking the IRS to consider another payment method and timeline to collect the taxes owed.

The taxpayer petitions the IRS directly or hires a tax resolution specialist to negotiate on their behalf to settle for a lower amount than the balance, and pay it off in installments over a specified timeframe. In this timeframe, no additional taxes, late fees, or interest is added to the balance. Alternatively, back tax settlements may also be paid off in a lump sum.

In order to settle back taxes, the taxpayer must meet the qualifications for the settlement program they are applying for. While some options are relatively simple, settling your back taxes for less than the original balance through the offer in compromise program frequently requires professional assistance, as the aforementioned 24,000 taxpayers whose offers were accepted actually constituted less than half of the total applicants for this program (which was over 59,000 in 2018).

Unless the taxpayer defaults on the installment agreement concurrent with the settlement, their account will be restored to good standing for the tax years in question.

Tax Settlement Fees

Professional settlement assistance is typically based on a percentage of the amount settled, similarly to contingency fees for attorneys. To determine if settlement is the right option for you, an investigation is required and this fee starts at $800.

Investigation fees may increase depending on case complexity, including your financial situation during and after the settlement.

What Tax Settlement Options Do I Have?

There are a variety of options if you do not think you can pay your entire federal income tax balance within a few months:

Offer in Compromise

Making an offer in compromise is the option that will settle your total outstanding balance for less than the recorded amount. A great deal of paperwork and negotiation is required along with a thorough examination of your financial circumstances to prove that the IRS cannot reasonably expect you to pay the balance in full.

Currently Not Collectible

Going into currently not collectible status is an excellent option if you cannot pay your tax bills plus your living expenses at the moment, but expect to in the future. While interest and penalties will still apply, the IRS cannot take any collection actions against you if your status is approved.

Installment Agreement

IRS payment plans, or installment agreements, are an option if you are up to date on filing your tax returns and owe $50,000 or less in taxes, penalties, and interest combined but expect that you need more than 120 days to pay the balance. There are setup fees for installment agreements that are lower if you agree to automatic withdrawals, and waived if you are low-income.

Penalty Abatement

Administrative penalty relief is available to taxpayers who received incorrect advice from the IRS. If you did not file your taxes, pay your tax bill on time, or make deposits when they were due, there is a “first time” penalty abatement available if you are up to date on your filings.

Is Tax Settlement Worth It?

Depending on your overall financial situation, back tax settlement may be the right option for you. For many who choose it, they find that settling their taxes can save a lot of money and provide peace of mind that they otherwise would not have had. 

Taxpayers who have experienced divorce, disability, and business closure are more likely to face tax bills they cannot pay, and do not reasonably expect to be able to pay off in the future. This makes back tax settlement a more palatable option. If you expect that you can pay your outstanding tax bill within one or two years and have not suffered a major financial loss or permanent loss of income, a payment plan or going into currently not collectible status is more likely to be your solution.

Need Help with a Tax Settlement?

The IRS is one of the most notoriously difficult creditors to work with. By hiring a tax settlement company, you have the assurance of working with professionals who are familiar with IRS procedures, language, and collection actions.

Tax Shark performs due diligence by determining if federal tax settlement is the right option for your financial situation. If it is, we handle all communications with the IRS so that you do not need to sacrifice your time on negotiation, hold times, and other aspects of the back tax settlement process.

By choosing a tax settlement company, you are also choosing a firm that is specifically focused on this area of tax administration (opposed to general tax preparation).

Why Should You Trust Us?

Tax Shark is transparent about our fee structure and screens prospective clients to ensure tax settlement is the right option. 

Our certified professionals have settled over $4 million in back taxes for our clients, and we are represented by the American Society of Tax Problem Solvers (ASTPS), American Institute of Certified Tax Coaches, and National Association of Enrolled Agents (NAEA) which have their own codes of professional conduct.