You may have heard places say they can settle with the IRS for “pennies on the dollar.” Sounds too good to be true. For most, it is. But, there is a way to settle with the IRS for less than you owe using the IRS’ Offer in Compromise program.
In certain instances, taxpayers are able to settle their tax debt, including interest and penalties, for a lump sum that is less than the total amount owed. For this to work, you must convince the IRS that it will not be able to collect the entire amount due because of your financial situation, or you must prove you do not owe the tax.
The consideration process is lengthy, typically lasting six months to a year, sometimes longer. You must make a deposit of 20% of the amount offered plus pay a filing fee at the time your offer is made. The IRS has no obligation to accept your offer. Therefore, to avoid wasting your valuable time and money, it is very important to evaluate your specific circumstances with a tax professional before making the offer to determine whether you are a good candidate for the program.
The IRS is near the top in the pecking order of creditors as far as who gets paid when. For this reason, they are very choosy in writing off debts owed to them. In general, without meeting specific criteria, you can’t write off tax debt in bankruptcy, and if there’s a tax lien filed, the IRS will get paid when you sell any real estate. For these reasons, the IRS’ Offer in Compromise process does not work like we do in private business and the IRS doesn’t work like any other unsecured creditor.
Before agreeing to settle with you, the IRS wants to make sure it would be in a much better position if it agreed to take a lump sum payment versus continuing collection efforts against you. Other than just your financial situation, some factors the IRS considers include:
- Time left on the statute of limitations
- Age, occupation, and other factors as to your ability to change your financial situation
- The amount owed - If you owe more than $250,000 (yes – this happens), the IRS will look at this with a lot more scrutiny than if you owe $10,000
- Your filing and tax deposit history since incurring the tax debt
- Availability of other sources of money, such as if you can borrow from friends, family, and other creditors
Please keep in mind that you can’t simply send the IRS a low-ball offer in hopes it will accept and settle your tax debt. For the most part, the Offer in Compromise process is pretty mechanical and based on your financial picture. However, it’s how you paint your financial picture that’s the key. The IRS will accept what you present to them and so it’s important to make sure you’re showing only relevant and required information and taking all the credits available to you. While it’s never required to work with a tax professional, it is important to know you have the right to work with someone who will represent you fairly and also set expectations for the Offer process.
If you are not a fit for the Offer in Compromise program, you may still be able to enter into an agreement with the IRS to pay the taxes back in installments. The monthly installment payment is determined based on your income and allowable necessary expenses. It is important to reach an amount that you can consistently make as failure to pay will be a problem in working with the IRS going forward.
In some cases, the IRS determines that you are unable to pay anything at the time of making the request and will classify you as “currently not collectible.” This does not make the taxes go away and interest and penalties continue to add up; however, the IRS will no longer take collection action against you while your financial situation remains the same. As you can imagine, there will be times where you are in a “not collectible” status and your situation improves. The IRS checks in with you from time to time to see if this is the case. If you go back to work, or you receive an inheritance, or your health issues are resolved, the IRS wants to know about this and will go back to taking collection action against you.
It is important to understand that the IRS is protecting the government’s interest to collect taxes from people that owe them. It is not an easy feat to convince the IRS that you can’t pay and that they should take less to settle you tax debt. So, unfortunately, only people that truly have no available assets or very little income to meet their necessary living expenses are eligible to get their tax debt written off. A careful review of your financial situation is the key to finding out if an Offer in Compromise might work for you.