Tax Debt versus penalty and interest
A common question my clients ask is “why won't the IRS just accept a check for the original tax amount and waive all the penalty and interest”. This question makes alot of sense and in the real world most creditors will consider making a deal that pays the original balance and waives interest. In the current economic situation many would be happy
to the original amount back.
But..this is the IRS' world we are talking about. So some things you need to understand:
Tax, penalties and interest are all the same to the IRS
The IRS considers the tax, penalty and interest to be all the same once assessed. It is all principal debt at that moment.
Settling tax debt with the IRS isn't “horsetrading”
The Free Dictionary defines “horsetrading” as “negotiation characterized by hard bargaining and shrewd exchange”
This type of negotiation works well when discussing a credit card debt, or the price of a car, but at the outset of the discussion with the IRS there is no bargaining. The process is not informal.
The formal process is called an “offer in compromise“. In an offer in compromise, rules are followed and at least in theory if the taxpayer fits into and follows those rules, the IRS has to settle the debt…formally.
IRS penalty reduction has it's own set of rules
If the taxpayer wants to challenge the penalty and try to strip it from the overall debt outside of the offer in compromise process, there is another legal process typically called “penalty abatement”.
This process is administrative and the IRS can forgive penalties that have already been assessed if the taxpayer meets certain formal criteria as well.
No horsetrading at the outset here either.
Bankruptcy must be seriously considered in most cases
From a financial standpoint and because of the formality that exists in relation to trying to “settle” the debt, bankruptcy is often the best long term solution for those with serious tax debt. If a taxpayer has serious tax debt, bankruptcy has to be considered.