IRS Tax Settlements – Step-by-Step Guide
IRS Tax Settlement is can be done with IRS payment plans, tax negotiation, and Offers in Compromise. Here´s what to do first.
IRS tax settlements usually come into play in one of two situations:
1. When a taxpayer owes money to the IRS that they cannot pay in full
2. When the IRS claims a taxpayer owes money and the taxpayer disagrees.
As a CPA with almost 30 years of experience settling IRS tax debts I can tell you from experience, there are three steps in successfully settling a tax debt:
1. Assessing your tax situation
2. Devising an IRS strategy
3. Making the IRS tax settlement deal
Assessing Your Tax Situation
The first step in a successful tax settlement is to properly assess your situation. If you have received several notices from the IRS, pull them out and review them. Is the IRS clear on what they are trying to collect for? Next get a copy of the tax return involved. Check it to get a handle on if you really owe the tax. Sometimes taxpayers make mistakes on their tax returns and really owe the money.
But almost as frequently, many times the mistake is made by the IRS and not the taxpayer. I remember an interesting study done by the Government Accounting Office several years ago. The government’s own accountants studied a sample of IRS notices and found an alarming percentage either contained errors; or attempted to collect penalties and interest that were not owed. Of course if you are working with an inexperienced tax advisor (who is more scarred of the IRS than you are) the advice you are likely to get is to just pay the tax.
But what if you don´t owe the tax? Or even worse, what if you don´t have the money?
Really the first step in any tax settlement is to assess what is really owed and if there is a legitimate basis to argue the tax is assessed in error.
Devising an IRS Strategy
Once you have reviewed the IRS’s notices and your tax records one of two situations will exist. Either you agree you owe the money or you disagree with what the IRS is claiming. If you disagree with the IRS, your strategy should be to challenge the tax they are attempting to collect. How this is best done, depends on the amount owed and how old the tax debt is.
If the IRS claims you owe a couple of hundred dollars, generally this type of situation can be resolved by correspondence. If you have good records you can provide the IRS to prove you don’t owe them money. Always send photocopies and keep your originals safe in your files.
On the other hand, if the IRS claims you owe thousands of dollars; your strategy will probably need to be different. In this type of situation it can take some face to face time with an IRS Collections Officer to clean up the mess. For example, you may need to file some past due tax returns that the IRS has “estimated tax” on. Or you may need to provide documentation for why you do not owe the tax.
Even if you agree you owe the tax the IRS is attempting to collect, you may have a reasonable cause to reduce the penalties and interest, or to negotiate a discounted lump sum payoff. This can be done either with an installment agreement (in the case of paying over time and sometimes reducing penalties and interest) or with a process called “Offer in Compromise” in the case of a discounted lump sum payoff.
If you owe several thousand dollars, your strategy should really be designed by a tax professional. Assuming you are not related to an IRS tax accountant, you can call our office at 713-661-1040 to hire us to assess your situation and to develop a custom strategy for you.
Making the IRS Tax Settlement Deal
The final step in the process is to make the deal. The method of doing can vary depending on how much is owed (or the IRS claims is owed).
For very small tax debts, as I have already noted, you can usually resolve the deal typically by correspondence.
For mid sized tax debts where you make full payment via monthly installments over 12 to 24 months, we can normally make this deal with the IRS by telephone conference.
For large tax debts, anywhere from $10,000 to several million dollars, we will often need to have a live conference or series on conferences with an IRS collection officer or appeals group. If you need this service, our CPA firm can help and we can do this for clients who live in all 50 States.