"settle IRS liability for pennies on the dollar … " 1/26/07
Ads appearing on television and elsewhere promise they can settle your tax debts for "pennies on the dollar". While that can sometimes be the result of efforts to resolve IRS liability, it does not reflect how IRS collection works. The IRS issued a warning for taxpayers to be careful of promoter claims.
You can not "sit down" and talk with an IRS collection officer and "settle" for a "discount".
Likely the ads are referring to an offer in compromise ("offer"). An offer requires you to pay the IRS the amount it could collect from you using its extensive collection tools (lien, levy, and wage garnishment) in a lump sum (there are deferred payment options). IRS collection tools include bank account levies, property seizure, and wage garnishment. The amount of the offer is "reasonable collection potential" (RCP), basically the "quick sale value" (QSV) of your assets plus the amount of your "future income" based on potential installment payments you could make. While there are payment options, they are considerably less favorable and you will not pay the offer amount in installments.
Depending on your RCP (the "lump sum" amount above) compared to how much tax, penalties and interest you owe, this can be "pennies on the dollar", but that would only be coincidence and not because the IRS is willing to "cut a deal". An offer is not a quick process, and will likely take 6 months to a year or more to process.
Interest is generally not subject to abatement. Interest is the "time value of money". You have not had to borrow money from the bank to pay your taxes and pay interest on the loan, and the government had to sell T-bills to fund spending rather than using your tax dollars and paid interest to the T-bill purchaser.
Penalties may be abated based on "reasonable cause". Generally this means you acted reasonably under the circumstances, but circumstances beyond your control prevented you from paying your taxes. In such cases the penalties implemented as a "stick" to "encourage" you to fulfil your tax obligations are ineffective and it is appropriate to remove them. If penalties are abated the interest charged on the penalties is also abated.