Offer in Compromise: How to Settle Your Tax Debt
The IRS might accept less than what you owe
Almost two-thirds of Americans—about 65%—either save none of their incomes or save just a small amount, according to a 2018 survey by Bankrate.com. This lack of savings can be almost catastrophic if they complete their tax returns only to realize that they owe a sizeable tax debt to the Internal Revenue Service.
The keyword here is "almost." The IRS is willing to work with taxpayers who come up short at tax time. Making an offer in compromise (OIC) is one of a few available options taxpayers have to work things out with the IRS. This program lets you settle your tax debt for less than what you owe.
Unfortunately, many consumers misunderstood the program, and some unscrupulous tax preparers abused it as well. The IRS made some changes effective July 16, 2006, to address these issues.
Some adjustments were made to the OIC process under the terms of the Tax Increase Prevention and Reconciliation Act.
There are three payment options for an offer in compromise:
- A lump-sum payment
- Monthly payments spread out over up to 24 months
- Monthly payments over the remaining statute of limitations of the tax debt
Applicants must submit a 20% down payment if they choose a lump sum payment plan, or they must immediately begin making monthly payments if they choose one of the two monthly payment options.
As for those abusive tax preparers who were submitting offers that didn't meet eligibility requirements, the IRS has made it a little easier for you to avoid them. You can prepare an offer yourself. The instructions that come with the forms are much easier to read and to follow.
Get the Instructions and Forms
You can obtain all the offers in compromise forms and instructions in a booklet on the IRS website. It's called Form 656-B. You can also call the IRS at 1-800-829-3676 and ask them to mail you the booklet, or you can pick it up from your local IRS taxpayer assistance center.
Other Tax Debt Strategies
The IRS offers at least four other options for digging your way out from under tax debt. You can enter into an installment agreement, a monthly payment plan for paying off the IRS.
A short-term installment plan gives you an additional 120 days to come up with the money if you think you can erase your debt in that period. Otherwise, if it will take you longer, you can ask to enter into a long-term plan. Certain restrictions apply.
"Not Currently Collectible" is a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so, giving you some time to get back on your financial feet.
The partial payment installment agreement is a fairly new debt management program where you receive a long-term payment plan to pay off the IRS at a reduced dollar amount. You can also file for bankruptcy, but very strict rules apply as to which tax debts are dischargeable and which cannot be erased in Chapter 7 or Chapter 13 bankruptcy proceeding.
Helpful Tips on Offers in Compromise
There's no guarantee that the IRS will accept your offer in compromise. The IRS bases its decision on several factors. Remember, the IRS might approve your offer if there's some issue as to whether you legitimately owe the tax. This situation falls under the umbrella of "doubt as to liability."
The IRS might also approve your application if—based on your submitted paperwork that documents your current financial situation—it appears highly unlikely that you'll ever be able to pay off the tax debt in its entirety. In this case, when you tally up your income and the value of your assets, it could come out to less than what you owe. This situation is referred to as "doubt as to collectability."
Finally, you might be approved if "payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances," according to the IRS. This hardship will apply even if there's no doubt or dispute that you owe the tax and if your income and assets exceed your debt.
You will not be approved, however, if you qualify for one of the installment agreements. If so, the IRS figures that you have ample resources to pay off your tax debt in full over time.