Penalty and Interest Abatement

• Immediately after a penalty or interest has been assessed, the IRS is often willing to abate the amount assessed. The taxpayer must be able to show what the IRS refers to as "reasonable" cause, or that the taxpayer exercised ordinary care and prudence in filing and paying taxes but, nonetheless, committed an action resulting in the assessed penalty. To take advantage of this abatement, taxpayers must file Form 843, Claim for Refund and Request for Abatement, with the IRS.
  
  

Negotiated Settlement

• The IRS allows taxpayers owing a tax liability and without the current financial means to pay the liability to reduce the amount owed through a negotiated settlement. Taxpayers taking advantage of this negotiated settlement may generally also not have sufficient future income (such as wages from employment or trust investment income) to pay the liability. The IRS refers to this negotiated settlement as an "offer in compromise." An offer in compromise reduces total IRS liabilities, consolidates the debt and sets up a future payment schedule.
  
  

Application and Negotiation

• To take advantage of an offer in compromise, taxpayers must formally file IRS Form 656 and pay a $150 application fee (as of January 2011). The application fee is due whether or not the offer in compromise is accepted or rejected by the IRS. Form 656 requires the taxpayer to propose a settlement to the IRS. The IRS has the option of accepting the proposed settlement, rejecting the proposed settlement or entering into negotiations for a revised settlement amount. In the majority of instances, the IRS will enter into negotiations for a revised settlement amount.
  
  

Payment Plan

• Taxpayers who anticipate sufficient future financial resources with which to pay IRS debts may request a payment plan with the IRS. Application for a payment plan must be made with Form 9465, Installment Agreement Request. An IRS payment plan does not serve to reduce the total amount of liabilities due --- it simply extends the time in which the taxpayer has to pay them without incurring penalties. Interest accrues throughout the payment plan period.