How Does IRS Settlement Work

John Hsu
Expert Contributor
Last Updated:
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Being behind on your taxes doesn’t only increase your financial stress. It also exposes you to the dreaded experience of dealing with the Internal Revenue Service (IRS). If you don’t resolve your tax debt promptly, the problem can quickly spiral out of control. You can be easily overwhelmed if you’re struggling financially or unfamiliar with tax regulations and procedures. Fortunately, there are measures you can take to settle your tax debt. Here’s a helpful guide to understanding IRS debt settlement.

What Is IRS Debt Settlement?

IRS debt settlement works in the same way as other kinds of debt settlement. It involves negotiating with the IRS to pay less than the amount you owe. A tax settlement typically results from a situation where you can’t afford to pay the amount the IRS has requested from you.

While the IRS ideally expects you to pay off your debt in a lump-sum payment, this may not be possible. For many American taxpayers, it’s difficult to calculate accurately how much they owe in taxes until their tax bills arrive. If you find that the amount due on your tax bill is significantly higher than what you can afford to pay, you should begin an IRS debt settlement process.

Do You Need to Hire a Tax Settlement Expert?

One of the most challenging aspects of the tax settlement process is that it involves substantial negotiations with IRS agents. These agents are expert investigators, highly skilled negotiators, and tenacious debt collectors. What’s worse is that the IRS has almost all the power to dictate the outcome of tax settlement cases, giving it the upper hand in most situations. It has the authority to take enforcement or collection actions with the full support of the federal government, including throwing you in jail for failing to pay your taxes.

Due to the potential for severe consequences of an IRS debt settlement, it’s a good idea to hire a tax settlement professional to deal with the IRS on your behalf. A tax settlement expert is well-versed in tax laws and IRS procedures. He or she can help you:

How Does IRS Settlement Work

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  • Accurately assess your tax situation
  • Let you know your options
  • Prepare all the required documents
  • Devise an effective tax settlement strategy
  • Negotiate with the IRS
  • Identify the IRS’s mistakes and unfair practices
  • Provide advice to help you make the right decisions

However, it’s important that you use caution when hiring a tax settlement expert. Recently, investigations have revealed that many tax settlement firms and professionals are severely lacking in knowledge, expertise, ethical practices, and financial results. In order to find a truly capable tax representative, you need to spend some time doing research and shopping around.

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How Does IRS Debt Settlement Work?

Getting a IRS debt settlement isn’t an easy or straightforward process. There’s no simple approach that works for everybody. There are many ways to settle your tax debt, and you need to choose one that best suits your situation.

Here are eight of the most common IRS debt settlement methods:

  • Fresh Start Initiative
  • Offer in Compromise
  • Partial Payment Installment Agreement
  • Currently-Not-Collectible Debt program
  • Statute of limitations expiration
  • Bankruptcy discharge
  • Removal of wage garnishments
  • Prevention of bank account levies

Fresh Start Initiative

The Fresh Start Initiative has been available for many years, but it was recently updated to be more easily accessible to American taxpayers. This program enables you to ask the IRS to reduce the total amount of tax debt you owe by either forgiving a portion of your debt or lowering the fees and penalties it has added to your debt.

In order to be eligible for the Fresh Start Initiative, you’re required to provide the necessary evidence to show the IRS that you can’t possibly afford to pay the amount they have requested from you. You can do this by providing a projection of your future earnings. If your application is approved, the IRS will reduce your tax debt and offer you a more manageable repayment plan, which typically involves extending your payments over several years instead of requiring you to make a lump-sum payment.

Offer in Compromise

If you’ve heard people talking about tax debt forgiveness, they were most likely referring to a successful Offer in Compromise process. The Offer in Compromise program is the most preferred method of attaining IRS debt settlement. This plan can help you settle your tax debt in a number of ways, including:

  • Lowering the principal amount you owe
  • Reducing the interest rate that accumulated on your back taxes
  • Reducing fees, penalties, and other costs
  • Extending your repayment term

Nonetheless, it’s not easy to qualify for the Offer in Compromise program. To determine your eligibility, the IRS will look closely at certain aspects of your financial situation, including:

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  • Current annual income
  • Projected annual income for the next few years
  • Current expenses
  • Projected expenses for the next few years
  • Ability to pay your tax debt, fees, and penalties
  • Equity in your assets, such as real estate, business, stocks, and bonds

When you’re applying for an Offer in Compromise, you need to convince the IRS that there’s no way you can pay off your tax debt. Bear in mind that the worse your financial situation appears to be, the better the tax settlement you’ll get. This is why many taxpayers with huge tax debts hire tax professionals to handle the Offer in Compromise process for them. An experienced and competent tax settlement expert knows all the tricks to make it look like you have less financial capability and assets than you actually do.

Partial Payment Installment Agreement

The Partial Payment Installment Agreement plan is a suitable option for people who have the ability to pay off their IRS debt but just need an easier way to do it. It’s a contract that outlines the terms of your repayment schedule and typically gives you a few more years to pay back what you owe. It’s far less demanding than having to pay all of your debt in a lump-sum payment.

Similar to the Offer in Compromise program, the Partial Payment Installment Agreement plan requires you to prove to the IRS that you don’t have the financial capacity to pay off your tax debt. Also, being in a bad financial situation will increase your chances of achieving a better settlement. The terms of your tax debt repayment schedule depend on how well you can negotiate with the IRS. A good tax settlement professional can make a big difference in the outcome of the negotiation.

Currently-Not-Collectible Debt Program

The Currently-Not-Collectible Debt Program doesn’t help with debt reduction or write-offs, but it gives you more time to pay back what you owe to the IRS. The IRS will grant you a deferment and put your payments on hold for a year or longer if you’re able to prove that your tax debt is currently not collectible. If you qualify for this program, you’re typically not required to make principal tax payments. However, you’ll rack up interest on the amount of tax debt you owe.

The Currently-Not-Collectible Program is especially useful if you’re facing IRS enforcement and collection actions, such as tax liens, wage garnishments, and other penalties. The program can be used as a tactic for delaying such actions, giving you more time to resolve your tax issues before the penalties become effective. In order to get your application approved, you need to have excellent negotiation skills and convince the IRS that you’re simply unable to clear your tax debt.

Statute of Limitations Expiration

Taking advantage of the statute of limitations expiration law to discharge your IRS debt is by no means an easy task, but it’s certainly possible. According to this law, the IRS has only 10 years to collect your tax debt, starting from the time you file your tax return. If you’re able to interrupt and delay its enforcement and collection activities for 10 years, you’ll be off the hook.

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However, it’s important to know that only a small percentage of tax debtors have managed to battle the IRS for a full decade and won. Tax holdouts are a risky business because the IRS may take extreme measures to collect tax debts and has no qualms imprisoning people whom they consider to be “tax cheats.”

Then again, you can increase your chances of success and minimize your risks by hiring a tax professional. Make sure you choose a tax expert who is highly experienced in using this particular tactic, because a tax holdout can be a complicated and confusing process.

Bankruptcy Discharge

Discharging your tax debt by declaring bankruptcy is probably the most powerful IRS debt settlement tactic. This is because it gives you the opportunity to move on with your life and enjoy absolute financial freedom, without owing a single cent.

Nevertheless, convincing the court to discharge the entirety of your tax debt can be a daunting challenge. The more likely outcome is having a portion of your debt discharged and can be considered a big win, one that will be hard to replicate via other tax settlement strategies.

Depending on your financial situation, you can either use Chapter 7 or Chapter 13 bankruptcy to get rid of your tax debt. If you decide to pursue Chapter 7 bankruptcy, you can have all of your IRS debt written off with just the stroke of a pen. However, it’s a lot more difficult to win this type of case. On the other hand, if you choose to declare Chapter 13 bankruptcy, you’ll only be able to discharge a portion of your debt, but you’ll have a much better chance of winning in court.

It’s highly recommended that you seek the assistance of a tax settlement expert or tax attorney if you wish to clear your tax debt through bankruptcy. You should think twice about entering a bankruptcy court without a tax expert on your side. The IRS has a lot of experience handling bankruptcy cases, so to stand a good chance of winning your case, you’ll need to have a tax representative with a sophisticated understanding of tax laws.

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Removal of Wage Garnishments

Wage garnishment is a stage in the IRS’s enforcement and collection process. When the IRS has determined that you aren’t making any effort to pay your tax debt, it’ll simply request your employer to redirect a portion of your paycheck its way. In most situations, wage garnishments are seemingly impossible to stop because the IRS isn’t required to follow strict legal guidelines when it decides to deduct money from your paycheck. In other words, it can do just about anything it pleases.

Nonetheless, if you can prove that the wage garnishments are having a significant impact on your ability to pay for necessities such as shelter, food, and clothing, you may be eligible for wage garnishment removal. If your application is approved, the IRS will put its enforcement and collection actions on hold, meaning that you’ll start receiving full paychecks again.

However, you should bear in mind that removing wage garnishments isn’t all that easy. It’s essential that you work with a tax settlement expert who has an established track record of success in stopping wage garnishments.

Prevention of Bank Account Levies

A bank account levy is another method that the IRS uses to collect tax debt. It’s generally more difficult to remove than wage garnishment, so you should try to prevent it before it goes into effect.

In order to get the IRS to release a levy on your bank account, you need to prove to the court that the levy will have a significant effect on your quality of life and result in dangerous circumstances. You’ll be required to provide certain financial information, including your outstanding balances, current and projected annual income, and the total value of your assets. To increase your chances of preventing a bank account levy, you have to make your financial situation look bad.

Achieving an IRS debt settlement can be a tedious, complex, and stressful task, especially if you have limited knowledge of tax laws. While it’s possible to get a settlement on your own, you’ll stand a better chance of success if you have a tax settlement expert guiding you through the process. If you need help resolving your tax problem, contact us now for a free consultation.

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John Hsu
Expert Contributor
Last Updated: