Tax Blog

What is a Tax Settlement, and Who Needs One?


Depending on your background, the word “settlement” might bring to mind any of the following:

  • The West Bank
  • The poplular role-playing game Fallout 4
  • Home buying
  • Class action lawsuits

But, what about tax settlements?

What is a tax settlement, and who needs one? How do you negotiate a tax settlement, and how much will it cost?

A tax settlement is a negotiated arrangement between a taxpayer and either the IRS or state tax authorities. The tax settlement allows taxpayers to settle an outstanding tax debt for less than the original amount owed.

Why would the IRS agree to an arrangement in which a taxpayer would pay less than the original amount owed?

Tax settlements, when they happen, allow for exceptional circumstances that have prevented the taxpayer from paying the full amount owed. The IRS negotiates a lower tax liability in situations where the IRS can see no hope of recovering the full amount.

What sort of exceptional circumstances?

Yes, it’s tempting to find some ‘exceptional circumstances’ of your own if it would decrease your tax burden, right? How bad do the exceptional circumstances have to be?

In short, the exceptional circumstances need to be extreme. When the taxpayer is near death, the IRS has been known to negotiate a tax settlement. When the taxpayer is unable to be employed, the IRS has been known to negotiate a tax settlement. When the taxpayer has absolutely no assets whatsoever that could be seized, the IRS has been known to negotiate a settlement.

Usually, however, the IRS doesn’t negotiate a lower amount of taxes owed. More often than settling, the IRS extends the tax deadline but maintains the original tax liability.

The IRS is one of the most formidable creditors out there. Unlike more run-of-the-mill creditors, the IRS has the legal power to seize your assets. Neither a private debt collector nor a credit card company has the legal power to seize your assets if you are unable to meet the debt deadlines.

How do you go about negotiating a tax settlement?

Before negotiating a tax settlement, the IRS will ask you to explore other payment options, such as a payment plan. A payment plan, as the name suggests, would allow you to space your tax liability over a span of time, paying in smaller increments rather than paying a lump sum. For more information, see the IRS information page here.

Secondly, before negotiating a tax settlement, the IRS requires that you file all required tax returns. In addition, you may be required to make an initial payment. Any payments submitted before a tax settlement is negotiated will reduce the taxes owed.

The next step toward negotiating a tax settlement may be to explore the Offer-in-Compromise Pre-Qualifier tool on “Offer-in-Compromise” is the term that the IRS employs instead of “tax settlement.”

The Offer-in-Compromise Pre-Qualifier tool probes your situation by asking questions such as “Are you in open bankruptcy proceedings?” and “Have you filed all required federal tax returns?” (*Hint: Open bankruptcy proceedings will disqualify you from negotiating a tax settlement or Offer-in-Compromise with the IRS.) You will also be asked to name your assets, your expenses, your income, and your proposed compromise.

What next?

If you decide to proceed with the tax settlement negotiation, the IRS has published all the required forms here and here. A $205 application fee is required for submitting the Offer-in-Compromise forms. It is possible to involve a third party, such as a tax settlement firm or a tax attorney. A tax attorney will file the required forms and may even accompany you to required meetings and interviews.

The IRS may negotiate a settlement, reducing the amount of money owed if there is an unresolvable dispute about the amount of the correct tax debt under the law. Similar to settling a lawsuit, the IRS may settle a claim if they feel that it is in their best interest to do so, rather than proceeding to court.

The IRS may also accept a reduced tax liability if there is credible doubt that the amount owed is fully collectible. For example, if the taxpayer’s assets and income are less than the full amount of the tax liability, then the IRS may settle for reduced tax liability. Finally, and interestingly, the IRS can accept a reduced tax liability based on terminology around effective tax administration. When requiring payment in full would either “create an economic hardship” or would be “unfair and inequitable” (IRS source), then the IRS may agree to a tax settlement.

In summary, a tax settlement is for taxpayers who are in debt to the IRS and who are unable to pay the debt in full. A tax settlement is known to the IRS as an Offer-in-Compromise. Information, necessary forms, and assessment tools are available on the IRS websites.

Who can help me with the tax resolution process?

Tax resolution is complicated, which is one major reason that so many people continue on with their tax debt. However, you don’t have to go it alone. If you enlist the help of a tax settlement company or a tax debt attorney, they can help you deal with the IRS and shield you from full exposure.

At The Tax Defenders, we have helped shield 15,000 clients through the tax relief process, allowing them to resolve their tax debt in the most financially advantageous way. The benefit of relying on our tax relief experts is that we know the IRS backward and forward, and we have more than 15 years of experience helping people work out different solutions to get back in the good graces of the IRS. We can help shoulder the stresses of your case and present you with the best solutions that will save you significantly in the end.

You can start with a free consultation and analysis. We take a very straightforward approach and let our clients know if we will be able to save them money over and above our costs. If you’re ready to get rid of your IRS debt, we’re here to help.