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Back Taxes and Tax Debt

How to settle tax debt with the IRS for less

Mark Steber

Chief Tax Information Officer

Updated on: July 08, 2022

You might have heard about how it is possible to settle your IRS tax debt for less than the amount you owe. While the IRS won’t let you off easy, there are some circumstances where you might be able to qualify for an offer in compromise (OIC).

An OIC is an agreement between you and the IRS that lets you settle your tax debt for less than what you really owe. This is not something everyone can take advantage of, and you must meet certain criteria to qualify. You should consider the OIC when you’re reviewing your IRS collection alternative options. OICs can be complicated. In many cases, you should look to a knowledgeable tax professional for help.

Who is eligible?

If you can demonstrate that you have no hope of paying your full tax bill, or that doing so would lead to severe financial hardship, then the IRS might agree to an OIC. The IRS rule: If you can’t pay your tax bill with your assets and/or monthly payments before the IRS time period to collect expires (10 years from the date of the assessed tax), you can qualify for an OIC.

The IRS will figure out your ability to pay, which includes a detailed look at your assets, income, and expenses to determine whether you are eligible for an OIC. This means you would provide verifiable information about your investments, available credit, retirement plans, other assets, and cash.

You will also have to show how much you could pay the IRS monthly in a payment plan. If you owe $20,000, can pay the IRS $500 monthly, and have 100 months until the expiration of the IRS collection statute, you would not qualify. This is because you can pay $50,000 over the 100 months, which is more than you owe.

If you are involved in open bankruptcy proceedings, you are ineligible for an OIC.

Making an offer

Before presenting your offer, you need to make sure you’ve filed all your required tax returns for at least the past 6 years (more if you have a business). You’ll also need to make all your estimated tax payments for the current year (if applicable). If you are a business owner and have employees, it’s essential that you pay all federal tax deposits for the current year before submitting your offer.

Once you take the above actions, you’ll be in filing and payment compliance. Then, you need to come up with your offer amount proposal to the IRS. The IRS usually applies a formula for the offer, based on any leftover monthly income after your allowed expenses, plus any income available from your assets.

The offer amount is a common pitfall in OIC applications. Even if you qualify for an OIC, you’ll need to be able to pay the offer amount in a lump sum or periodic payments. So, before you apply for an OIC, understand whether you’ll be able to pay the offer amount.

Keep in mind that failing to pay your OIC installments on time will default your agreement and require you to pay the remaining balance of your original tax debt, plus penalties and interest recalculated from the date of the OIC agreement. The IRS is not likely to enter into a second settlement agreement with you.

Arriving at a payment schedule

Your first payment will depend on the offer you make and the payment option you choose. There are two payment options to choose from when requesting an OIC:

  • Lump sum: You can submit a 20% down payment on your total offer amount, along with your application and application fee ($205). If the IRS accepts your offer, you would then pay the rest of the offer amount in 5 or fewer installments.
  • Periodic payments: You can repay the IRS through monthly payments spread out over a period of up to 24 months. Here, too, you would need to submit your first payment along with your application. You must keep paying the monthly installments until the IRS decides on your offer.

You might be exempted from making the down payment (lump sum offer), continuous payments during the OIC investigation period (periodic payment offer), and the application fee, if you are eligible for a low-income certification.

What happens when the IRS decides

Once you submit your offer, the IRS can take months to consider your application and decide. The IRS has two years to accept or reject your OIC application.

If the IRS accepts your offer, you will have to follow the terms of the offer. To complete your OIC, you must file all your required returns and pay all your tax obligations for the next 5 years. If the IRS rejects your offer, you will have 30 days to appeal the IRS decision.

Other ways of resolving tax debt with the IRS

The IRS offers many solutions to address your tax debt other than the OIC. They include:

  • Extensions to pay (up to 180 days) and payment plans are the most common tax debt arrangements people make with the IRS.
  • Currently not collectible status: Under this program, the IRS delays collection and payment for taxpayers in serious financial trouble and without enough monthly income to pay their necessary living expenses.
  • You can review these options here.

While there are no guarantees on any particular offer, knowing your options when it comes to paying off tax debt is important. Having a tax professional can be a big help.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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