Can You Really Settle Your Tax Debt with the IRS for a Fraction of the Amount Due?

Randy shares the Inside Scoop on the IRS Offer In Compromise and Settling Debts with the IRS

Have you ever seen a commercial promising to settle your tax bill “for just pennies on the dollar?” It may sound too good to be true, and unfortunately, it often is. While it is possible to settle a tax debt for less than the full amount owed through an Offer in Compromise (OIC) with the IRS, it is not as simple as hiring a experienced tax pro or using special negotiating skills.

An OIC is an agreement between a taxpayer and the IRS to settle tax liabilities for less than the full amount owed. The IRS will only consider an OIC if the taxpayer can demonstrate that they are unable to pay the full amount in a reasonable time, there is doubt as to the amount of their tax liability, or exceptional circumstances make full payment cause an “economic hardship” or be “unfair” or “inequitable.” To determine a taxpayer’s ability to pay, the IRS looks at their income, assets, and “reasonable collection potential” (RCP).

To apply for an OIC, taxpayers must complete the IRS financial forms for individuals or for businesses, which includes detailed information about their financial situation. The Offer in Compromise Pre-Qualifier on the IRS website can help taxpayers determine their eligibility and prepare a preliminary proposal. As part of the OIC process, taxpayers must also come up with a minimum offer amount based on their financial disclosures and choose a payment period of either five months or two years.

The devil is in the detail on what is required to be included and what is not.  Failure to disclose certain finances can result in the offer being denied and even perjury charges being filed against the applicant.  This is when acquiring professional assistance is highly recommended.

Before submitting an OIC, taxpayers must also file all required tax returns, make estimated tax payments for the current year, and make federal tax deposits for the current quarter if they are a business owner with employees. It is also important to note that taxpayers in an open bankruptcy proceeding are not eligible to apply for an OIC, as their debts must be resolved through the bankruptcy process.

It is important to remember that the IRS will only accept an OIC in cases where a taxpayer cannot pay their full tax bill in a reasonable time or there are exceptional circumstances. If you have the means to pay your tax debt, no amount of negotiating will convince the IRS to settle for less than you owe.

If the IRS does not accept the offer, there is an opportunity to appeal within 30 days of the rejection.  This is often when some of the best deals are formed.

The taxpayer should realize that the IRS offer in compromise process is not quick usually taking ten to 18 months from beginning to end.  Other good IRS programs are available for taxpayers depending on financial situation and the type and year of tax involved.

If you or someone you know may benefit from the IRS Offer In Compromise program, call us today at (214) 214-3000 for a free consultation and know what option are out there.