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IRS Tax Settlement: 3 Ways to Possibly Settle Your Taxes For Less

If you owe taxes, there are times when you can settle your taxes for less than you owe, although it's not an easy task.  There are three main ways to settle your taxes for less than you owe, including an Offer in Compromise, a Penalty Abatement, and a Partial Payment Installment Agreement.

If you've skipped filing your taxes for a few years, you'll need to start by filing your tax returns or amending any return the IRS filed for you (known as a substitute return) to update the information before you can work out a settlement or agreement with the IRS to pay taxes you owe.

Settle Taxes for Less: Offer in Compromise

Only a small percentage of Offer in Compromise (OIC) requests are accepted by the IRS.  There are only three situations which might get your Offer of Compromise accepted.  Basically, if the IRS believes that it is going to cost them more money to try to collect the debt you owe than what they'll get through the compromise, they're more likely to approve it.

When you request an Offer in Compromise, you will typically need to send payment of at least 20% of your total taxes owed.  If your OIC is not accepted, you do not get the 20% back.

Use IRS Form 656/656-A and form 433A.  You will probably want to enlist the help of a tax professional because the Offer in Compromise are sometimes rejected if the forms are not filled out correctly.

The three situations which may qualify you for an Offer in Compromise include:

  • Doubt of Liability 

    If the IRS can't prove that you owe the total amount they're requesting, if there is doubt of your liability, they are likely to approve an Offer in Compromise.
  • Doubt of Collecting Liability

    If the IRS thinks they're going to spend more money than they'll ever get from you, or that the chance of you paying the full amount owed in back taxes is unlikely, you may be accepted for an Offer in Compromise.
  • Effective Tax Administration 

    In rare situations, if the amount of taxes the IRS is requested you to pay is correct, and there is a good chance you would pay it, but that the payment of such taxes would create such a financial hardship that you'll find it difficult to continue meeting your living expenses, an Offer in Compromise may be accepted.  This option of settlement is normally granted to individuals with disabilities or senior citizens on fixed incomes.

Settle Taxes for Less: Penalty Abatement

If you request a Penalty Abatement, you're simply asking for removal of the penalties added to your total taxes owed for not making your payment by the due date.  A Penalty Abatement does not reduce the total principal balance of taxes you owe.  For late tax payers, penalties regularly count for up to 25% of the total tax balance, so being granted a Penalty Abatement can give you a more affordable option for getting your taxes paid so they are current.

Of the three methods of settling your taxes for less than you owe, the Penalty Abatement is among the easier ones to qualify for.  If you have a good reason for not filing or paying your taxes by the due date, you can get your penalties removed. 

Send a letter to the IRS asking them to give you a Penalty Abatement, or fill out Form 843 to request one.  You'll need to specify a legitimate reason for not paying or filing your taxes on time.

Some common reasons for receiving a Penalty Abatement might include:

  • Getting divorced recently
  • A death in the family
  • Natural disaster which destructed your records, home, etc.
  • Illness or disability
  • Lengthy unemployment

Settle Taxes for Less: Partial Payment Installment Agreement

If you owe the IRS more than $10,000, you can apply for a Partial Payment Installment Agreement (PPIA).  If you choose this option to settle your taxes for less than you owe, you'll need to be prepared to fill out IRS Form 433, which indicates your assets, liabilities, and income, and Form 9465. The IRS will review the information on Form 433 to determine your eligibility, and may require that you sell some of your assets to satisfy a portion of your tax debt before they'll approve the partial payment installment

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