What is Tax Debt Reduction?

How to settle with the IRS for less than you owe… and why it’s risky.

If you’ve got a tax debt, you’re probably very interested in reducing it any way you can. You would naturally assume this process would be simple enough, comparable to say a credit card or loan settlement. However, an income tax debt is unlike any other type of debt you’re going to encounter.

While the IRS does offer reduction or settlement offers, there are a number of items to consider before you request one. For while you may be a perfect candidate, you might also be starting down a road that will promise only loss and heartache. Understanding a few basics will help you determine which experience you’re likely to have.

Making an Offer in Compromise

You may have come across the phrase “Offer in Compromise” while searching the internet for a fast tax solution. The Offer in Compromise, or OIC, is an IRS settlement agreement that enables you to pay less for your tax debt than you actually owe. While this sounds like – and can be – a great proposition, reading the fine print on an OIC is critical.

Up Front

Typically, the IRS will expect you to make a payment, perhaps as much as 20% of your balance, when you submit an official tax debt reduction request. You may even be asked to continue to make payments while your request is considered, which may take up to a year. Also, as long as you’re considering money, consider this: the IRS can hit you with a penalty for requesting an OIC when you don’t qualify. Be sure to read the guidelines carefully, which you can find at IRS.gov.

Financial details matter

When you request an OIC, you’re essentially saying that you lack the means to pay your total tax debt and your financial situation is probably going to remain unchanged for the foreseeable future. The IRS requires a detailed income and expense analysis to determine if this is indeed the case. This assessment will include an itemized list of all of your earnings, any assets you have and your monthly bills. The downside to this is that if you don’t qualify, you’ve now provided the IRS with a forensic look into your finances – not ideal if you have to negotiate an alternate resolution later on.

Understanding the IRS review process

When you have to wait anywhere for six months to a year to find out if your tax debt will be approved to reduction, this time can actually come back to haunt you down the road. The life of your delinquent balance is ten years from the date of assessment. After this period, the Collection Statute Expiration Date (CSED) arrives and you’re no longer liable for the debt. However, requesting an OIC puts the clock on hold; if it takes 10 months for your request to ultimately be denied, you have to tack that ten months onto your debt’s lifespan. That also means another 10 months of penalties and interest.

The upside of tax debt reduction

If you meet all the qualifications and conditions for an OIC, you might just get approved. This can mean a substantial reduction in your tax bill and the chance to get it over with faster. On the other hand, even if you’re denied, you still have other resolution options available to you. You may want to consult with a licensed tax professional before attempting an Offer in Compromise (or to review any alternate solutions). This will save you some time and, quite possibly, considerable stress.