Tax payment plan vs. tax settlement: What’s the difference?

Many serious tax problems stem from a simple and relatively common situation: being unable to pay the amount due to the IRS. What many people who find themselves in this situation do not realize, however, is that being unable to afford a tax payment is not necessarily what lands a person in hot water with the IRS. Instead, it is how these individuals choose to deal with the situation - or not deal with it - that determines how much trouble they are likely to find themselves in.

For taxpayers who are having trouble keeping up with their financial obligations to the IRS, there are two important tools to be aware of: tax installment plans and tax settlement agreements. Both of these tools can be used to help prevent a person's tax problems from escalating. Despite some similarities between them, however, there are some important differences as well, both in terms of how they operate and when they may be used.

Tax payment plans

If a taxpayer cannot afford to pay the full amount that he or she owes to the IRS in a given year, it may be possible to negotiate a tax payment plan. A payment plan agreement allows a taxpayer to spread out his or her tax liability over a series of smaller monthly payments instead of paying the entire amount due all at once.

To determine whether a person qualifies for a tax installment plan, the IRS will evaluate several factors, including the individual's income and expenses, as well as his or her assets and liabilities. Other relevant circumstances, such as job loss or other financial hardship, may also be considered. In some cases, the IRS may accept payments of as little as $25 per month toward a tax installment plan. Until the debt is paid in full, all of the individual's future tax refunds will be put toward the amount owed.

Tax settlement agreements

Unlike a tax installment plan, which typically requires that a tax debt be paid in full, a tax settlement agreement allows a taxpayer to settle a debt with the IRS for less than the full amount owed. A tax settlement with the IRS is also known as an offer in compromise doubt as to collectibility.

In order to qualify for an offer in compromise doubt as to collectibility, a taxpayer must prove to the IRS that he or she is unable to pay the full amount due, either with a lump sum payment or through an installment plan. If an offer in compromise is accepted, the taxpayer typically must pay the entire settlement amount within two years.

In an effort to ease the tax burden on people affected by the recent economic downturn, the IRS has substantially expanded the Offers in Compromise program. Recent changes include a revised formula for calculating an applicant's ability to pay, as well as new allowances aimed at helping participants keep up with their other financial obligations, such as student loans and credit card payments.

Contact an attorney

People who have fallen behind on their taxes or who anticipate having trouble meeting their tax obligations in the future should discuss their circumstances with a knowledgeable tax attorney. An experienced tax lawyer can help taxpayers understand the risks and benefits of the different options available to them and help them to get out of debt without running afoul of the IRS.