A tax settlement is an arrangement that allows a taxpayer to retire an outstanding tax debt to a local or national tax agency for less than the original amount owed. Tax agencies sometimes allow this type of settlement when extenuating circumstances exist that would prevent the taxpayer from honoring the full debt. While not every situation is appropriate for engaging in a settlement process, individuals who owe taxes often find that agencies are willing to explore the situation and determine if a settlement is possible, based on current regulations and the circumstances of the taxpayer.
There are several benefits associated with attempting to negotiate a tax settlement. The most obvious is that the taxpayer ultimately tenders a considerably lower amount of funds to the tax agency. Assuming that the situation of the applicant meets certain qualifications, a settlement amount may be determined and presented within a very short period of time. Once the balance is paid, the account is considered settled in full, meaning that the taxpayer is no longer subject to late fees and other types of penalties that would be incurred otherwise.
Another benefit of a tax settlement is that the taxpayer avoids the placement of liens on personal property or the implementation of a garnishment on his or her wages. Typically, the negotiation of the settlement remains between the individual and the tax agency involved, and does not include any third parties. This can also help to lower the costs to the individual, since there is no need to engage legal services to deal with liens or fight the garnishment actions.
Not everyone is eligible for a tax settlement. Should the tax agency involved determine that the individual does have sufficient income to pay off the entire balance due over time, the settlement request may be rejected in lieu of offering to accept monthly payments of a certain amount until the tax debt is discharged. Typically, the outstanding balance continues to accrue penalties and late fees during the repayment period, creating a situation in which the taxpayer ultimately pays considerably more than the original debt.
In many instances, a tax settlement calls for paying off the entire settlement amount within a specified period of time. During that time frame, no late taxes or tax interest is assessed on the balance of the settlement. Taxpayers may choose to pay off the settlement amount in one lump sum. If this is not possible, many tax agencies will set up a schedule of payments that are within the means of the taxpayer, with the last payment coinciding with the final date attached to the settlement offer.