Can I Negotiate My Tax Debt?

For many people, owing money to the Internal Revenue Service (IRS) is an uncomfortable reality. Because it is backed by the Federal government, the IRS maintains the right to place liens on property, garnish wages, seize assets and auction them off for a fraction of their true value, and issue bank levies that require submission of funds within twenty-one days.

Whew! It’s no small wonder that many people get intimidated and look for help to get out from under a tax debt problem. There is hope, however, and it is possible to negotiate tax debt with the IRS. In fact, the IRS can be a very patient creditor – as long as it knows that it will eventually get paid. Let’s take a closer look.

Negotiating Tax Debt

The first step to negotiating tax debt with the IRS is to take action and to not procrastinate. Throwing IRS notices into a drawer are a form of denial that will come with consequences in the form of late payment penalties and interest expense – and that’s in the best case scenario. Also, make certain to always file a tax return – even if the amount owed is too high to be paid off in one lump sum when filing, as penalties will often be higher absent a filing.

Once you’ve filed and determined that you cannot afford to pay your full tax liability, it’s time to pursue an installment agreement with the IRS. Installment agreements are quite common and involve making regular monthly payments for up to a period of five years, so long as the total liability does not exceed $50,000.

Partial Payment Installment Agreements take place when the IRS agrees to accept less than the full amount owed, when it is clear that monthly payments stretched over a period of many years will not cover the entire tax liability. An experienced tax attorney can help with calculating what the IRS might settle for given the individual specific circumstances involved with a potential partial payment installment agreement.

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Offer in Compromise

An Offer in Compromise is a form of debt settlement with the IRS in which the taxpayer makes an offer to pay for an amount that is considerably less than the full amount owed. Most offers in compromise are rejected – in fact only about one in seven are accepted by the IRS – and only in those instances when a firm case gets established that it’s actually in the best interests of the IRS to accept the offer.

In other words, it must be shown that the IRS won’t be able to recoup any more than the amount of the offer in compromise without further considerable expense to the agency. Offers in Compromise must be accompanied with payment of at least 20% of the tax debt, and are contingent upon proving extreme financial hardship in paying the full amount owed.

Meantime, it is also possible to pursue Currently Not Collectible status, following the IRS receiving evidence that a taxpayer lacks an ability to pay. Once status is granted, it becomes possible to file a collection appeal to prevent an IRS bank levy, property lien, or asset seizure.

More About Negotiating Tax Debt

There are important ancillary issues to consider related to the process of negotiating tax debt. For instance, when taxes have fallen past due, the Federal government can issue a wage garnishment or bank levy, either of which can have serious implications on personal financial matters.

In a wage garnishment scenario, the IRS contacts an employer, informs them of delinquent tax liabilities and instructs them to pay the IRS instead of the employee.

This is both costly and embarrassing, but upfront discussion with the IRS informing them of an inability to survive financially in the event of such wage garnishment can help stave off this outcome.

Similarly, in a bank levy scenario, a bank is informed of your delinquent tax debt and instructed to send an amount up to what is owed within twenty-one days of receiving the levy. Yikes. When resolving IRS debt, make certain to discuss forestalling or releasing any existing bank levies.

Statute of Limitations

There is a little known statute of limitations in place when it comes to the IRS collecting on delinquent tax debt. Simply put, the Federal government has ten years from the date of assessment (usually the original filing date) to collect all tax monies owed to it.

A reputable tax attorney could come in handy in such a situation when the statute is close to expiring, as filling collection appeals can buy time in the face of pending wage garnishment and/or bank levies while making it more likely that the ten years elapse.

Finally, filing bankruptcy can absolve some or all tax debts – as Chapter 7 provides full discharge of allowable debts and Chapter 13 allows for discharge of some debts outside of an established payment plan. However, bankruptcy remains a last resort option that comes with long-term repercussions on a credit score and profile – so it should only be pursued with a full understanding of its benefits and drawbacks.