Settle Tax Debt

Although some businesses claim that they can settle tax debt for 'pennies on the dollar', these claims are rejected by many tax professionals, who regard such boasts as a scam which will only waste the taxpayer's time and money. Such businesses make convincing presentations, and claim to be specialists in settling tax obligations. They believe they have experience and a familiarity with these issues that even other professionals may not have, and they seek to negotiate a lower settlement. A certain tactic which is used to reduce IRS debt is called an 'Offer in Compromise'. While this is a legitimate procedure used to settle tax debt, some businesses may neglect to mention a few items.

A person intending to settle tax debt has several options as to the course he will take. Deciding to do something about the debt is an important first step. The problem will not go away on its own and the Internal Revenue Service is certainly not just going to forget about the obligation! Therefore, it is much better if an individual faces up to this responsibility and begins the repayment process. An 'Offer in Compromise' is just one way to settle tax debt. There are other options. If the taxpayer acknowledges that the amount demanded is correct, he may elect to set up an installment agreement. This is simply a monthly payment plan to pay off the money which is owed. At times there is another alternative, which is to establish a more long-term payment plan, which may include paying a reduced amount. If more time is needed, under certain circumstances there is a program where the Internal Revenue Service agrees to wait on the collection of this debt for about a year. The obligation is considered 'not currently collectible'. Of course this latter option would only be available for those who truly have no other alternatives, perhaps due to illness or lack of assets.

If one was in dire straits, filing for bankruptcy might discharge the debt, although this would be governed by strict rules under a Chapter 7 or Chapter 13 bankruptcy. This is a last resort type of option, for a bankruptcy has a lasting negative effect upon a person's credit score. Effects from a bankruptcy can be felt for ten years in some cases, as certain creditors apply this length of time to determine whether one is worthy of obtaining credit after a bankruptcy. If a person is (understandably) reluctant to destroy his credit score in this way, yet believes that other options are also unacceptable, an 'Offer of Compromise' might be considered as a way to settle tax debt.

Under an 'Offer of Compromise', the taxpayer offers to pay the compromise amount. He is also required to file taxes on time and pay taxes promptly for the next five years. Any refunds, payments or credits which were already applied to the account before the Offer in Compromise was submitted will be kept by the Internal Revenue Service. Any refunds which would have been due to the taxpayer during the year that the Offer in Compromise is approved also end up in the hands of the IRS. Now the process sounds reasonable so far, but what businesses which specialize in such matters do not always reveal is that about three quarters of settlement offers are rejected by the Internal Revenue Service! Also, there is no real need to 'specialize' in this procedure. Forms (#656, #433-A) to help determine whether one has any chance of qualifying for this program are available from the IRS and taxpayers can complete these application forms on their own or with the help of a tax professional. No special insight is needed in order to settle tax debt. Firms which claim otherwise become somewhat suspect.

The standards for meeting IRS requirements for an Offer of Compromise are high, and allowable expenses fairly stringent. For example, there are no differences in cost of living allowances, despite the fact that such costs can vary widely from one region to the next. Therefore, instead of a means to settle tax debt, sometimes an Offer of Compromise ends up just wasting more of the taxpayer's time and money. Tax professionals tend to steer clear of such proceedings, for presenting an Offer of Compromise leaves little room for other settlement offers. If a person can afford to hire a lawyer, he probably won't qualify as someone who has no chance of repaying the loan to the IRS. Other items which may discourage people from applying for an Offer of Compromise are that there is a $150 fee for the privilege, and the process can take from 1-2 years to complete. While it is true that needy persons can apply to have this fee waived (Form 656-A), the fact that fees on the debt continue to accrue is enough to make a debtor hesitate. Also, if the IRS determines that an individual does not qualify for the Offer of Compromise, or if a person does not fulfill the agreed-upon terms, the offer can be revoked and the full tax liability can be reinstated, along with penalties and interest. Also, collection procedures may begin at a more vigorous level.

Altogether, it seems that the most effective way (time and expense-wise) to settle tax debt is to simply set up a payment plan and repay any tax liability which the taxpayer agrees is due. Here the Scripture found in Romans 13:7-8 seems appropriate: "Render therefore to all their dues: tribute to whom tribute is due; custom to whom custom; fear to whom fear; honour to whom honour. Owe no man anything, but to love one another; for he that loveth another hath fulfilled the law." If a person suspects he has become the victim of a tax scam, this should be reported to state regulators, the Attorney General or the Federal Trade Commission.