Introduction
Dealing with the Internal Revenue Service (IRS) can be an overwhelming experience. If you owe back taxes and are unable to pay the full amount, you may be wondering if there is any possibility of reaching a settlement. The good news is that the IRS does offer settlement options to taxpayers who are facing financial difficulties. In this article, we will explore the IRS settlement process and discuss how much the IRS usually settles for in the United States.
Table of Contents
- What is an IRS settlement?
- Factors that determine the settlement amount
- Steps to negotiate with the IRS
- Key takeaways
- Frequently Asked Questions (FAQs)
- Conclusion
What is an IRS settlement?
An IRS settlement, also known as an Offer in Compromise (OIC), is a program that allows taxpayers to settle their tax debts for less than the full amount owed. It is designed for individuals who are unable to pay their tax liabilities in full and can demonstrate financial hardship.
When you submit an Offer in Compromise to the IRS, you are essentially proposing a compromise or settlement amount that you believe is a fair and reasonable payment in order to resolve your tax debt. The IRS will review your offer and assess its feasibility based on your financial situation.
Factors that determine the settlement amount
The settlement amount that the IRS will usually accept depends on several factors, including:
- Your income
- Your expenses
- Your assets
- Your ability to pay
- Your future earning potential
The IRS considers these factors to determine your reasonable collection potential (RCP). The RCP is the amount that the IRS believes it can collect from you over a certain period of time. If your offer is less than the RCP, it has a higher chance of being accepted.
It is important to note that the IRS will also consider the equity in your assets when determining the settlement amount. Equity is the fair market value of your assets minus any outstanding loans or mortgages. The IRS may require you to sell certain assets to pay towards your tax debt before accepting a settlement offer.
Steps to negotiate with the IRS
Negotiating with the IRS can be a complex process, but it is possible to reach a settlement if you are well-prepared and have a strong case. Here are the steps to negotiate with the IRS:
1. Evaluate your financial situation
Start by evaluating your financial situation and determining if you are eligible for an IRS settlement. Calculate your income, expenses, and assets to get a clear picture of your financial standing. This will help you determine the maximum amount you can offer as a settlement.
2. Gather supporting documentation
Collect all the necessary documentation to support your case. This may include pay stubs, bank statements, tax returns, and any other relevant financial records. Make sure your documentation is organized and complete to strengthen your negotiation position.
3. Submit Form 656
Fill out Form 656, Offer in Compromise, and submit it to the IRS along with the required documentation. Be sure to provide accurate and detailed information to avoid any delays or complications in the review process.
4. Pay the application fee
Include the application fee when submitting your offer. As of 2021, the fee is $205, but there are exceptions for low-income taxpayers. If you qualify for a low-income exception, you may be eligible for a reduced fee or a fee waiver.
5. Wait for the IRS review
Once your offer is submitted, the IRS will review your financial information and evaluate your offer. This process can take several months, so it requires patience. During this time, it is important to stay in compliance with your current tax obligations.
6. Consider appealing a rejection
If the IRS rejects your offer, you have the option to appeal the decision. An appeal gives you the opportunity to present additional evidence or argue for a reconsideration of your case. It is important to consult with a tax professional or attorney if you decide to appeal.
Key takeaways
- The IRS offers settlement options, known as Offers in Compromise, to individuals facing financial difficulties.
- The settlement amount depends on factors such as income, expenses, assets, and future earning potential.
- Preparing a strong case and providing supporting documentation is crucial when negotiating with the IRS.
- The IRS charges an application fee for Offers in Compromise, but low-income taxpayers may qualify for exceptions or waivers.
- If your offer is rejected, you have the option to appeal the decision.
Frequently Asked Questions (FAQs)
1. Can anyone qualify for an IRS settlement?
No, not everyone is eligible for an IRS settlement. The IRS has specific criteria that taxpayers must meet in order to qualify. Generally, you must demonstrate financial hardship and prove that paying the full amount would cause undue financial hardship.
2. How long does the IRS review process take?
The IRS review process for Offers in Compromise can take several months. It is important to be patient and continue to comply with your tax obligations during this time.
3. Can I negotiate a settlement on my own?
Yes, you can negotiate a settlement with the IRS on your own. However, it is recommended to seek professional assistance from a tax professional or attorney who has experience in dealing with the IRS. They can guide you through the process and help you maximize your chances of success.
Conclusion
Reaching a settlement with the IRS is possible if you are facing financial difficulties and unable to pay your tax debts in full. By understanding the factors that determine the settlement amount and following the steps to negotiate with the IRS, you can increase your chances of reaching a favorable resolution. Remember to gather all necessary documentation, submit an accurate offer, and be patient during the review process. If your offer is rejected, consult with a tax professional or attorney to explore your options. With the right approach and preparation, you can find a path towards resolving your tax debt.
