Negotiating Tax Debt With States

When the IRS or state revenue department agree to settle the tax liability through an IRS or state program, this is referred to as a tax settlement.
Each state varies on what type of tax settlement program they offer and the guidelines in submitting them. However, most have very stringent guidelines when submitting a tax settlement.

Basically tax settlements fall into 2 general categories:

1.The first type is where the tax liability cannot be paid back in full and the taxpayer may qualify to pay back less than the tax liability owed. This would include an Offer in Compromise, partial payment plan and abatement of penalties.

2.There are two additional options if the individual doesn't qualify for a tax settlement. One is a monthly payment plan, known as an installment agreement, is set up to pay back the tax debt over time. The other is uncollectible or hardship and is usually due to an extenuating circumstance where the taxpayer cannot pay anything at this time. It could be family, a medical condition or unemployment. Until the individual's financial situation changes, the IRS or state will hold off collections temporarily.This does not stop the interest from accruing or eliminate the debt.

Typically, a taxpayer who owes both the state and IRS tax liabilities, the state liability is usually less. Most of the time, an installment agreement will need to be done with the state.

However, there are taxpayers who cannot pay the state back in an installment and are looking for tax relief, typically in a tax settlement where less than the full amount of the tax liability is paid back. An Offer in Compromise is the typical way this is done.

When the IRS or state revenue department agree to allow the taxpayer to pay less than the full amount owed, this is an Offer in Compromise.

The Offer in Compromise/tax settlement program is available in most states. Most states will require full financial disclosure when submitting an Offer in Compromise.

States make their decision on whether to accept an Offer in Compromise on various factors. The individual's income, expenses, and assets are typically included in these. Other determining factors are medical condition, age and other things that created the tax debt.

State tax departments will exam what could be collected in the future given the taxpayers age, employment status, medical condition and any other extenuating circumstances as well as looking at the taxpayer's current financial state.

A tax settlement with state agencies can usually take anywhere from a few months to over a year. It is important that the correct forms are filed and that the right substantiating information is submitted to avoid have the Offer returned.

An experienced tax representative should be able to help with evaluating whether a taxpayer would actually qualify for an IRS tax settlement or state tax settlement. They will make sure that the lowest possible amount is offered and that correct forms and documentation are submitted.