If you owe taxes and feel like you will never be able to pay the full amount, you may be wondering whether the IRS will accept a smaller payment than what you owe. The short answer is yes, but only in very specific situations and only through a formal IRS program called an Offer in Compromise (OIC).
This blog explains how this option works, who qualifies, and what steps are involved when trying to settle your tax debt for less than the full balance.
What Is an Offer in Compromise?
An Offer in Compromise is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed. The IRS only accepts an offer if it believes that the amount offered is the most it can reasonably expect to collect from the taxpayer within a reasonable period of time.
Unlike simply negotiating with a private creditor, the IRS uses strict standards and financial calculations to determine whether a settlement is appropriate.
When Is a Settlement Possible?
The IRS considers an Offer in Compromise when:
1. You Cannot Pay the Full Amount:
If paying the full tax debt would create financial hardship or if your income and assets leave you without the ability to satisfy the liability, you might qualify.
2. There Is a Doubt About the Amount Owed:
If you truly believe that the IRS has incorrectly calculated your tax debt, you may be able to dispute the amount through a special type of offer.
3. It Would Be Unfair or Hardship to Collect the Full Amount:
In rare cases, even if you technically have the ability to pay, you may qualify if collecting the full tax would be unfair or cause serious economic hardship.
It is important to understand that the IRS will not simply settle your debt because you can’t afford it. The settlement must represent the IRS’s best estimate of what it could collect from you over time.
Who Can Apply for an Offer in Compromise?
Before you can submit an offer, you must meet certain eligibility rules, including:
- You’ve filed all required tax returns.
- You’re current with estimated tax payments for the year, if required.
- You’re not in an open bankruptcy proceeding.
- You have received a bill from the IRS for the tax debt you want to settle.
If you fail to meet these basic criteria, the IRS will not process your offer. IRS
How the IRS Evaluates Your Offer
When you submit an Offer in Compromise, the IRS looks at your complete financial picture:
- Income: The money you earn now and are expected to earn in the near future.
- Expenses: Your monthly living costs and necessary bills.
- Assets: Things you own that could be liquidated to pay the IRS, like savings, property, or vehicles.
The IRS uses these factors to calculate your reasonable collection potential (RCP), the amount the IRS believes it can collect from you. Your offer must generally be equal to or greater than your RCP for the IRS to accept it.
How to Submit an Offer in Compromise
Filing an Offer in Compromise involves:
- Form 656: The official offer form from the IRS.
- Financial Statements: IRS financial disclosure forms like Form 433-A (for individuals) or Form 433-B (for businesses).
- Application Fee and Initial Payment: There is usually a nonrefundable fee and payment requirement, though low-income taxpayers may qualify for a waiver.
- Supporting Documentation: Records that support your income, expenses, and assets.
Once submitted, the IRS will review your offer and may take several months to make a decision. The IRS also offers a pre-qualifier tool online so you can estimate whether you might qualify before submitting a full application.
What Happens While the IRS Reviews Your Offer
While your offer is pending:
- The IRS generally will suspend most collection actions, including levies and garnishments.
- You must continue making any required payments if you chose a periodic payment plan as part of the offer.
If the IRS rejects your offer, you have the right to appeal the decision.
Two Common Misconceptions About Tax Debt
- Myth: Everybody qualifies for a settlement.
- Fact: The IRS approves only a small percentage of offers because the criteria are strict and based on realistic ability to pay.
- Myth: You can settle for just “whatever you can afford.”
- Fact: The IRS must agree that the amount you offer is reasonable based on your financial ability and what the IRS believes it can collect later.
What If You Do Not Qualify?
If the IRS rejects your offer or you do not qualify, you still have other options to manage your tax debt, including:
- Installment Agreements to pay over time.
- Currently Not Collectible status if you cannot pay any amount due to hardship.
- Penalty relief in some situations.
Tax Relief Helpers can guide you through every program the IRS offers and help determine which option fits your situation.
Take Control of Your Tax Debt
An Offer in Compromise can be a lifeline for qualifying taxpayers, but it is not guaranteed and requires thorough preparation. If you think settling your tax debt for less than you owe is your best (or only) option, acting promptly and with the right information makes all the difference.
Tax Relief Helpers can help you evaluate eligibility, complete the forms correctly, and communicate directly with the IRS to improve your chance of success.
Call (800) 659-6706 or request your free consultation today.