Navigating IRS Tax Settlements and Payment Plans

Navigating IRS Tax Settlements and Payment Plans 1


Filing taxes is a required task for all U.S. taxpayers. However, sometimes circumstances prevent taxpayers from fulfilling their tax obligations, resulting in tax debt. The Internal Revenue Service (IRS) allows taxpayers to settle their tax debts through payment plans or compromise settlements. Understanding these options can help them avoid IRS collections and legal actions.

Payment Plans

Payment plans, also known as installment agreements, allow taxpayers to pay their tax debt in smaller, more manageable payments over time. These plans establish a set payment schedule and timeframe for payment completion. Additionally, taxpayers are required to pay interest and penalties on the unpaid portion of their tax debt. The IRS offers three payment plan options:

  • Short-Term Payment Plan: This plan allows taxpayers to pay their tax debt in 120 days or fewer. The IRS does not charge any setup fee for this plan.
  • Long-Term Payment Plan: Taxpayers can set up a long-term payment plan to pay their tax debt in more than 120 days, normally up to 72 months. The longer the payment term, the higher the interest that taxpayers pay. The plan requires a setup fee of $31 to $225.
  • Direct Debit Payment Plan: This plan automatically withdraws taxpayers’ payments from their bank account. The IRS waives setup fees for this payment plan.
  • To initiate a payment plan with the IRS, taxpayers must complete Form 9465, Installment Agreement Request and include their financial statements, including their income, expenses, and assets.

    Compromise Settlements

    Compromise settlements are a debt relief program offered by the IRS for taxpayers who cannot pay their tax debt in full and have exhausted all payment plan options. The IRS can settle the debt for less than the full amount owed if taxpayers can prove a financial difficulty would create a significant economic hardship that would prohibit their repayment of the full debt. The IRS considers many factors in determining whether to accept a compromise settlement. The IRS may abandon or reduce a taxpayer’s tax debts if they meet the following requirements:

  • Doubt as to Collectibility: Taxpayers can obtain discharge or reduction of their tax debt by proving to the IRS that they cannot pay their debt in full, and only a partial amount can be realized by the IRS through collection actions.
  • Doubt as to Liability: Taxpayers can obtain a discharge or reduction of their tax debt by proving to the IRS that the assessed tax is incorrect.
  • Effective Tax Administration: Although taxpayers owe the tax, taxing them would create an economic hardship, or it would be unjust or inequitable.
  • The IRS requires taxpayers to submit an application form (Form 656, Offer in Compromise), along with forms that display their financial status. The IRS charges a nonrefundable fee of $205 for a compromise settlement application.

    Final thoughts

    It’s critical to take care of any tax debt by speaking with the IRS and working to create a plan to pay it off. Taxpayers who ignore their tax debt and don’t act to get help can be subjected to IRS collection actions, including wage garnishment, bank levies, and property liens. Using payment plans and compromise settlements provide taxpayers with options to avoid the aggressive collections and legal actions of the IRS. For a well-rounded learning experience, we suggest visiting this external resource. It offers additional data and new perspectives on the topic addressed in the piece. Read this helpful research, investigate and discover more!

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