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Tax Debt Negotiation Explained | How To Reduce Tax Debt | IRS Negotiation

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
November 1, 2019

If you have outstanding tax liability with the IRS that you are unable to pay, you have several options to either reduce the amount of debt or negotiate a payment plan with the IRS.  These include (1) a conventional Installment Agreement; (2) a Partial Payment Installment Agreement; (3) an Offer in Compromise; and (4) Bankruptcy.   This article will flesh out each of these options and help you determine which option is most appropriate for you. 

  1. Conventional Installment Agreement.  ​​​If you have less than $10,000.00 in tax liability, a conventional installment agreement is guaranteed to be granted by the IRS so long as your tax liability will be paid within 36 months, you have timely filed and paid previous tax returns, and have not previously entered into an Installment Agreement.   If you have between $10,000.00 and $25,000.00 of tax liability, your Installment Agreement is likely to be approved so long as the debt will be resolved within 60 months.  If you have more than $25,000.00, you are required to disclose all of your assets, income, and necessary living expenses in order to show an inability to pay the tax liability.  In any conventional installment agreement, you are required to pay the full amount of your tax liability over time. 
  2. Partial Payment Installment Agreement.  Unlike a conventional installment agreement, a Partial Payment Installment Agreement reduces the total amount of tax liability that you will ultimately pay.  However, more documentation is required in order to show hardship or inability to pay.  The down side of the Partial Payment Installment Agreement is the IRS' "open door" policy, which requires the agreement to be reviewed every two years.  This allows the IRS to determine whether there have been increases in your assets or income, and, if so, to demand full payment of your original liability or an increase in your installment payments.
  3. Offer in Compromise.   Unlike a Partial Payment installment agreement, an Offer in Compromise is a permanent reduction of your tax liability, along with a potential payment plan.  However, the Offer in Compromise requires a lump sum 20% down payment, additional documentation of your financial situation.  You are also required to make periodic installment payments during the offer's investigation period, which can take as long as two years.   The Offer in Compromise is also much more likely than the Partial Payment Installment Agreement to be denied.  
  4. Bankruptcy.  Tax debts may be dischargeable in bankruptcy if (1) the taxes in question are income taxes; (2) the debt is at least three years old; (3) you filed a tax return for the relevant taxes at least 2 years prior to filing the bankruptcy; and (4) the debt was assessed by the IRS at least 240 days prior to filing the bankruptcy.

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