If you or your business owe taxes to the IRS or the state, you have probably wondered if it is possible to settle your tax debt for less than owed. You may have heard radio or TV ads promising to settle your taxes for “pennies on the dollar” if you “call now!” with The Price is Right theme music playing the in the background. Is this too good to be true?
The bottom line is that it is possible to settle state and IRS tax liabilities for less than owed if you qualify.
As typical, the ad gives you a half-truth as a ploy to sucker you into reaching into your wallet and handing over your cash.
As Benjamin Franklin once said, “half the truth is often a great lie.”
If a firm claims they can settle your tax debt without first asking about the particular facts of your case such as your income, expenses, and assets then close your wallet and run the other way.
The next question that you may ask is, “Well, how do I qualify to settle taxes for less than owed?”
I could write a 700-page book trying to answer this simple question because the taxing authorities (I suspect, intentionally) created complicated rules and procedures to determine if a taxpayer qualifies to settle taxes for less than owed.
Trying to specifically explain how someone qualifies to settle taxes is like Warren Buffett trying to explain how someone can consistently beat the S&P 500 Index (Warren Buffet’s mentor, Benjamin Graham, tried to do this and he spent 700 pages trying to do so in Security Analysis).
The tax settlement rules and procedures confusingly intermix, crisscross, and weave to create something of giant puzzle that may leave you scratching your head.
Throw in taxing authorities’ employees who misinterpret or try to play games with these complicated tax settlement rules and procedures, and what you are left with is a very low overall settlement success rate. However, this does not necessarily mean that you are not a good candidate for a settlement.
In 2019, the IRS’ overall tax settlement acceptance rate was only ~33%. See https://www.irs.gov/pub/irs-prior/p55b–2020.pdf, page 58. In IRS speak, the IRS calls settling taxes for less than the amount owed an “Offer in Compromise.”
This ~33% tax settlement acceptance rate does not surprise me. I know a few taxpayers who attempted to settle their own tax liabilities only to not even get past the initial screening phase (basically, the taxing authorities usually reject an offer if the taxpayer did not follow settlement procedures such as completing the government settlement forms correctly).
In regard to the overall low success rate, a competent and ethical tax relief professional should have a much higher tax settlement success rate because a good professional knows what it takes to achieve a settlement and should pursue a settlement resolution strategy only if she or he determines the taxpayer is a good settlement candidate.
In my own experience as a tax relief professional, I successfully reached a settlement in about 75% of the settlements I have attempted (I have settled taxes for significantly less than owed for liabilities ranging from as little as $20,000 to as high as $1,000,000). A majority of my unsuccessful settlements resulted because my clients failed to comply with the tax laws while my settlement proposal was under review (the taxing authorities will reject or return a settlement offer if a taxpayer fails to comply with the tax laws). I should mention (legal disclaimer) that my past performance may not be indicative of future results.
To illustrate why having an experienced tax professional is often a wise decision, I will share a few real-life examples of my experience settling tax liabilities.
My first example involves a non-profit business client of mine that previously hired a local attorney to try to settle its ~$230,000 IRS tax liability. The IRS rejected the local attorney’s settlement offer (I suspect that the local attorney did not have a lot of experience settling tax liabilities).
Following rejection of the local attorney’s settlement offer, the non-profit hired me to file an appeal in response to the IRS’ rejection.
Importantly, the non-profit business showed more than enough positive cash-flow to fully pay its tax liability before the collection statute of limitations expired. With this positive cash-flow in mind, I began to think about how I could persuade the IRS agree to a settlement.
When I filed my appeal, I argued, among other things, that the IRS should settle the tax liability for less than owed because the non-profit provided valuable charitable services to its community (I showed how other businesses in the community excluded the specific individuals that my client catered to).
In the end, I convinced the IRS Appeals Office to settle the ~$230,000 tax liability for ~$30,000 (thirteen cents on the dollar).
Another example involves a business that owed ~$600,000 in IRS back taxes.
During negotiations, the IRS employee (called an “Officer Specialist”) attempted to violate the tax laws by rejecting to settle solely based on the fact that the business operated at a loss for the last five years (this IRS employee also failed to contact me despite my numerous messages).
I filed an appeal in response to the IRS employee’s erroneous rejection explaining how the IRS employee, who appeared to act in bad faith, violated the law by failing to consider any other facts and circumstances of my client’s case (the tax laws require the IRS to treat taxpayers equitably and fairly).
I convinced the IRS Appeals Office to settle the ~$600,000 tax liability for ~$25,000 (about four cents on the dollar).
As another example, a business had racked up almost $1,000,000 in IRS employment taxes.
In preparing my offer settlement narrative, I explained, among other things, how circumstances beyond the taxpayer’s control prevented taxpayer from paying its expenses including its employment taxes (I provided credible proof such as economic statistics from the local government agency and the federal government agency). Further, I went on to explain with supporting evidence how the economic business cycle presented a material risk to my client’s cyclical business (among other factors, the IRS considers a taxpayer’s prospects of earning more income when determining whether to settle).
Without having to file an appeal, I settled this ~$1,000,000 tax liability for ~$60,000 (six cents on the dollar).
As one last example, an individual accumulated ~$100,000 in federal income taxes over a nine-year period.
During settlement negotiations with the IRS, I argued, among other things, that the taxpayer failed to pay his federal income taxes over the nine-year period because he would have suffered an economic hardship meaning he could not pay his basic living expenses (I showed through bank statements and other supporting documents that was the case). In addition, I showed my client’s income for the current year was less than the previous year.
Without having to file an appeal, I settled this ~$100,000 tax liability for ~$600 (less than one cent on the dollar).
I could continue with other examples, but I think you get the picture—each settlement case presents its own unique challenges.
If it is not obvious, I would like to add that settling tax liabilities is not easy. Taxing authorities generally try to do everything and anything to reject a settlement offer.
Also, taxing authorities take a considerable amount of time to review a settlement offer (it is not uncommon to spend six to eight months trying to reach a settlement).
There is nothing like the long and difficult road of a tax settlement to deter taxpayers from even trying. These are the harsh truths that most advertisements will fail to mention.
In summary, the simple answer regarding tax settlements is that a competent tax relief professional needs to know the facts of your individual case to tell you whether you qualify to settle your taxes for less than owed.
You may think, “That is a bunch of baloney—I have read articles online where people explained you need to show you cannot pay the taxes in full before the collection statute expires to qualify to settle your taxes.”
Again, this is one small piece of the 100+ other pieces of the puzzle that one needs to look at to determine if you qualify to settle your tax debt for less than owed.
On one end of the tax settlement spectrum, for certain taxpayers, the taxing authorities will settle the taxes for less than owed regardless of whether the taxpayer can pay the taxes in full before the collection statute expires.
On the other end of the tax settlement spectrum, some states will not settle taxes for a business taxpayer that continues to operate regardless of any other fact or circumstance.
The bottom line is—due to the taxing authorities’ complicated settlement rules and procedures—you should speak to a reputable and competent tax relief professional to determine whether you qualify for a tax settlement. If you are, in fact, a good settlement candidate, have an experienced tax relief professional (a tax pro who has years of experience handling tax collections cases—not just general tax issues) negotiate the settlement on your behalf. This can very easily make the difference between settlement and rejection. It can also result in a settlement that is tens (or even hundreds) of thousands of dollars less than that which would have been reached by doing it yourself (or with the help of an inexperienced tax relief professional).
If you would like to learn how my firm, Fortress Tax Relief, can help with your tax liabilities—and whether you qualify for a tax settlement–pick up the phone and give us a call. We have caring and knowledgeable tax professionals who would be happy to answer any questions you have and to outline a solution tailored to your specific circumstances. We do not accept all cases, and we may be able to steer you in the right direction if another firm or professional is a better fit for your needs. There is no charge for a telephone consultation, so give us a call!