Learn how to settle tax debt with the IRS using an Offer in Compromise
Can you settle IRS tax debt?
Yes. It is possible to settle tax debt for less than you owe with the IRS. You use a solution known as an Offer in Compromise or OIC. This is the solution you may hear advertised that boasts you can “settle tax debt for pennies on the dollar.”
It’s worth noting, however, that the IRS doesn’t just hand OICs out to anyone who requests one. The IRS must have a reasonable expectation that they cannot collect the full amount owed. You basically need to prove that the reduced settlement amount is the maximum amount they can expect to receive.
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How to settle tax debt step by step
- First you apply for an Offer in Compromise (OIC) using Form 656.
- You must pay a $186 application fee to apply.
- You must also provide a full financial disclosure that details all your income, expenditures, assets and equity.
- For wage earners and self-employed workers, you then must complete Form 433-A the “Collection Information Statement”; you also will need to submit supporting documentation.
- The IRS reviews your application package. If it’s accepted, settlement negotiation begins.
- You and the IRS come to an agreement of what percentage of your back taxes you can afford to pay back.
- Then once accepted, you have 2 years to repay that amount.
You must continue to file taxes for each new year. If you receive a refund from filing within that two-year period, the IRS will apply it towards your settlement.
Are you eligible to settle your tax debt?
|Your tax filings must be current||You have an open bankruptcy proceeding|
|You’ve received at least one bill about the tax debt you want to include in the offer||The IRS determines you have the means to pay the full amount with an Installment agreement (IA)|
|You must make all required tax payments for the current year||You have equity in assets that could be used to pay off any back taxes in-full|
If your tax returns are not current and you aren’t current with the payments for the current year, the IRS simply returns your offer.
6 Considerations as You Settle Tax Debt
#1: Penalties and interest continue to accrue
Very few things stop IRS penalty accrual, including filing an Offer in Compromise. While the IRS considers your offer, penalties and penalty interest will continue to apply. Once you reach a settlement, this stops being an issue. You pay the amount agreed, and you’re free and clear.
#2: Bankruptcy blocks tax debt settlement
Tax debt is generally resolved with the rest of your debts during a personal bankruptcy filing. So, you can’t have an open bankruptcy case and file for tax debt settlement at the same time. If you already filed for bankruptcy, the courts should resolve the issues with your tax debt during the bankruptcy proceedings.
#3: There is a possibility to get the application fee back
If you’re struggling to pay your taxes because of extreme financial hardship, that $186 application fee may be hard to manage. The good news is that if the IRS determines severe financial hardship, then they may refund the fee. They will let you know after you offer is processed whether you are eligible to request a refund.
#4: Form 433-A helps you determine an appropriate offer
You can’t just offer the IRS some random amount and expect that they’ll accept it. You also don’t have to just guess at what’s the right amount. Settlement negotiation always starts with the amount determined through Form 433-A; for the record, there is also Form 433-B if you’re applying for settlement as a business.
#5: You can make the settlement in payments
You won’t be required to pay everything back at once. You can choose the OIC Periodic Payment option. This allows you to make the settlement in installments. You basically pay the IRS each month with fixed payments. You can pay more than the minimum required amount if you have extra funds. However, you must pay the full amount agreed within two years from settlement acceptance.
#6: Defaulting on an OIC is extremely bad
If you don’t pay the amount agreed, the IRS will not be kind. You will be liable for the original tax debt, minus any payments you made. They’ll also reapply all penalties and accrued interest charges. What’s more, they will be much less willing to work with you; a second settlement agreement is highly unlikely.
How to settle tax debt yourself
You have two options to file an Offer in Compromise. You can work with a tax debt resolution service or you can try to file on your own. If you want to settle tax debt yourself, simply download the IRS Form 656 Booklet. In includes Form 656 and Form 433-A form that you need to fill out for your financial disclosure. Complete the forms and send them in to file on your own.
A word of warning about settling tax debt on your own
Form 433-A provides a full financial disclosure, so it’s not exactly a short form. In fact, it’s a 10-section form. If you think filing your taxes is complicated, this is significantly more complex. And if the form is not filled out correctly and completely, the IRS will reject your OIC application.
As we mentioned above, OICs are not readily accepted by the IRS. If there’s any potential that you can pay off the full amount, they won’t accept your OIC. They will also reject you if you have any assets you can liquidate to pay off the debt.
So, proving that you qualify for an Offer in Compromise is not an easy task. Unless you know what you’re doing, we recommend working with a resolution team! It will increase your chances for a successful outcome and an accepted OIC.