How to Get an IRS Settlement Agreement

An IRS settlement agreement provides a formal pathway for a taxpayer to resolve an outstanding tax debt or dispute with the Internal Revenue Service. This process is designed for situations where a taxpayer’s financial circumstances or disputes over tax liability make full and immediate payment unfeasible. An agreement establishes a clear conclusion to a tax matter, bringing the taxpayer into compliance while allowing the IRS to close the case.

Types of IRS Settlement Resolutions

The IRS offers several resolution programs for different financial situations. The most well-known is the Offer in Compromise (OIC), which allows certain taxpayers to resolve their tax liability for less than the full amount owed. An OIC is considered when a taxpayer is in financial difficulty, and the amount offered is the most the IRS can expect to collect. The agency evaluates a taxpayer’s ability to pay, income, expenses, and asset equity when considering an OIC.

For taxpayers who can pay their full tax debt but need more time, an Installment Agreement (IA) is a common solution. This arrangement allows for monthly payments over a set period. Individuals who owe less than $50,000 may qualify for a payment plan of up to 72 months, while businesses with balances under $25,000 may receive up to 24 months. Under an IA, the original tax, plus accrued penalties and interest, must be paid in full.

A Partial Payment Installment Agreement (PPIA) may be granted when a taxpayer can make monthly payments but cannot pay the full liability before the collection statute of limitations expires. The IRS accepts smaller monthly payments, understanding the full debt may not be collected. This option is for those who can pay consistently but cannot cover the entire amount.

In cases of severe economic hardship, the IRS may place an account in Currently Not Collectible (CNC) status. This is a temporary suspension of collection efforts, not a forgiveness of the debt. The IRS will periodically review the taxpayer’s financial situation, and collection can resume if their ability to pay improves.

Preparing Your Settlement Proposal

Preparing for a settlement requires careful financial disclosure. The primary documents are Form 656, Offer in Compromise, and the Collection Information Statement, which is Form 433-A for individuals and Form 433-B for businesses. These forms provide the IRS with a detailed snapshot of your financial picture and can be obtained from the IRS website.

The Collection Information Statement requires a complete inventory of your finances. You must list all assets, such as cash, investments, vehicles, and real estate, along with their current market value. All income sources must be documented with pay stubs or profit and loss statements, and you must provide a breakdown of your monthly living expenses based on IRS standards.

You must gather supporting documentation to submit with your forms. This includes several months of bank statements, recent pay stubs or income records, and copies of vehicle registrations and property deeds. For certain assets, you may need independent appraisals to substantiate their value.

The information you provide allows the IRS to calculate your reasonable collection potential, which is the amount it believes it can collect from you. This calculation is central to the decision-making process, especially for an Offer in Compromise, and any discrepancies can lead to a rejection of your proposal.

The IRS Review and Negotiation Process

Your settlement proposal must be submitted according to IRS instructions. For an Offer in Compromise, this involves mailing the completed forms, supporting documents, and a non-refundable $205 application fee. Depending on the payment option chosen, an initial payment of the offer amount may also be required. Taxpayers who meet low-income certification guidelines may have the application fee and initial payment waived.

After submission, the IRS conducts a preliminary review to confirm your eligibility. To be eligible, you must have filed all required tax returns and made necessary estimated tax payments. If the package is complete, your case is assigned to an examiner for a detailed review, which can take several months as they verify your financial information.

If an examiner finds your offer is too low, it may open a negotiation phase. The examiner may contact you or your representative to discuss their findings and propose a counteroffer. This allows you to provide additional clarification or documentation to support your proposal.

If your offer is accepted, you will receive a formal acceptance letter. If it is rejected, the IRS will explain the reasons and inform you of your right to appeal the decision. An appeal must be filed within 30 days of the rejection date to have your case reconsidered by an independent office within the IRS.

Finalizing and Maintaining Your Agreement

When a settlement is reached, the terms are formalized to be legally binding. In complex cases, this may involve a Closing Agreement on Form 906, which provides a final resolution to the specific tax matters. This document prevents the IRS from pursuing additional collections on the settled debt, as long as the taxpayer adheres to all terms.

A standard condition for an Offer in Compromise is a compliance period of five years from the acceptance date, or until the offered amount is paid, whichever is longer. During this period, the taxpayer must file all required tax returns on time and pay all new tax liabilities in full and on time. This commitment ensures the taxpayer remains in good standing.

Failure to meet these obligations results in a default on the settlement. The consequences of a default are severe, as the original tax debt, along with all suspended penalties and interest, is reinstated in full. The IRS can then resume collection actions on the entire original balance.