The Truth About Settling Your Tax Debt With The IRS
Can you settle IRS tax debt for less than the full amount you owe? Sometimes, but only when you meet specific IRS requirements. In most cases, settling tax debt for less refers to an Offer in Compromise (OIC) rather than informal bargaining with the IRS. An OIC allows eligible taxpayers to request resolution of certain tax liabilities for less than the full amount owed, but acceptance is not automatic or guaranteed.
Hikaru Services helps individuals understand complex tax situations and explore potential resolution options based on their circumstances. Understanding how an Offer in Compromise works can help taxpayers avoid unrealistic expectations and make more informed decisions about unpaid tax obligations.
What Settling IRS Tax Debt For Less Actually Means
Taxpayers sometimes use the phrase “tax debt settlement” to describe any effort to reduce or manage an IRS balance. However, settling tax debt for less generally refers to an Offer in Compromise.
An OIC is an IRS resolution program that may allow a taxpayer to settle an eligible tax liability for less than the full amount owed when specific requirements are met. It is not an informal negotiation where taxpayers simply ask the IRS to lower their balance.
The IRS evaluates the taxpayer's circumstances before deciding whether to accept an offer. Depending on the situation, the review may involve income, allowable expenses, assets, and the taxpayer's ability to pay.
An OIC should also be distinguished from other resolution options. An installment agreement may provide a structured way to pay an eligible balance over time, while Currently Not Collectible status may temporarily delay collection when a taxpayer cannot currently afford to pay. Neither option settles the balance for less in the same manner as an accepted OIC.
The Three Bases For An Offer In Compromise
The IRS considers an Offer in Compromise under three primary bases:
Doubt As To Collectibility
This basis applies when there is doubt that the taxpayer can pay the full tax liability within the legally available collection period. The IRS evaluates the taxpayer's financial circumstances and reasonable collection potential when considering the offer.
Doubt As To Liability
This basis may apply when there is a genuine dispute about whether the assessed tax liability is correct. Supporting information is important because the taxpayer must establish why the liability may not be correct.
Effective Tax Administration
An OIC may also be considered under effective tax administration in certain circumstances when there is no doubt that the liability is correct or fully collectible, but requiring full payment would create an exceptional situation under the applicable IRS rules.
These bases are different, and taxpayers should understand which basis may apply before preparing an offer.
Who May Be Eligible To Apply For An OIC?
An Offer in Compromise is not available to everyone. Taxpayers generally need to satisfy applicable IRS requirements before an offer can be considered. If unpaid tax obligations are connected with broader financial difficulties, taxpayers may also need to understand how other forms of debt relief could interact with their situation. In some circumstances, resources that assist with bankruptcy may provide additional information when bankruptcy is being considered.
General compliance considerations include:
Required tax returns must be filed: Outstanding required returns should generally be filed before submitting an offer.
Current tax obligations must be addressed: Current estimated tax or payroll tax responsibilities must be addressed as applicable.
The taxpayer must have received a bill: The taxpayer generally must have received a bill for the tax debt included in the offer.
Open bankruptcy matters can affect eligibility: A taxpayer generally cannot have an open bankruptcy proceeding when applying for an OIC.
Meeting these basic requirements does not guarantee that an offer will be accepted. The IRS still reviews the taxpayer's financial circumstances and the applicable requirements.
How The IRS Evaluates An Offer In Compromise
The IRS looks at the taxpayer's overall financial position when evaluating an Offer in Compromise. The review can include several important factors:
Income: The IRS considers the taxpayer's income and financial resources.
Allowable expenses: Certain necessary expenses are considered when evaluating the taxpayer's ability to pay.
Assets: The value and equity of assets may affect the evaluation.
Ability to pay: The IRS considers whether the taxpayer has the ability to satisfy the liability.
Reasonable collection potential: The taxpayer's overall ability to contribute toward the liability is an important part of the evaluation.
Because these factors are considered together, a large tax balance alone does not establish eligibility for an OIC. Likewise, financial hardship alone does not guarantee that an offer will be accepted.
Application Costs, Payments, And Low-Income Exceptions
Applying for an Offer in Compromise involves specific requirements. The review calls for the article to identify the $205 application fee, explain applicable initial-payment requirements, and identify low-income exceptions. These figures and requirements should be verified against the current IRS guidance before publication.
The payment structure can depend on the terms of the offer and the taxpayer's circumstances. Certain qualifying taxpayers may be eligible for exceptions to the application fee and initial-payment requirements.
Because application requirements can change, taxpayers should review the current IRS Offer in Compromise guidance before submitting paperwork or making payments.
What Happens While An Offer Is Reviewed?
After an OIC is submitted, the IRS reviews the information and supporting documentation provided with the application. Taxpayers should ensure that financial information is complete and accurate and should continue addressing applicable tax responsibilities during the process.
An offer under review should not be treated as guaranteed approval. The IRS may request additional information or determine that the proposed offer does not meet its requirements.
Keeping financial records organized can make it easier to respond to requests and understand the status of the resolution process.
Alternatives When An OIC Is Not Appropriate
An Offer in Compromise is only one potential IRS resolution option. If an OIC is not appropriate or does not fit the taxpayer's circumstances, other options may need to be considered.
Installment Agreements
An installment agreement may allow an eligible taxpayer to make payments over time rather than paying the full balance immediately. This option does not generally settle the balance for less than the amount owed.
Currently Not Collectible Status
Currently Not Collectible status may temporarily delay IRS collection when a taxpayer cannot currently afford to pay. It does not erase the tax debt, and penalties and interest may continue to accrue.
The appropriate option depends on the taxpayer's circumstances, eligibility, and ability to meet the applicable requirements.
Understanding OIC Compliance After Acceptance
Acceptance of an Offer in Compromise does not mean taxpayers can ignore future tax responsibilities. Maintaining compliance after acceptance is important because an accepted offer can be affected if the taxpayer fails to meet applicable requirements.
Taxpayers should continue filing required returns and addressing current tax obligations. Understanding the terms of an accepted offer and maintaining compliance can help taxpayers avoid problems after resolution.
Because an OIC involves specific IRS rules and continuing responsibilities, taxpayers should review the official requirements carefully.
Avoiding Common Misunderstandings About Tax Settlement
Tax settlement is often misunderstood because advertisements may make the process appear simpler or more certain than it actually is. Taxpayers dealing with collection activity should also understand that federal debt collection rules may provide certain protections. Reviewing information about understanding your rights under the FDCPA with tax debt can help provide additional context about debt collection rights.
Taxpayers should remember:
An OIC is not automatic: The IRS must review and approve the offer.
Not everyone qualifies: Eligibility depends on applicable requirements and individual circumstances.
A lower tax balance is not guaranteed: An offer may be rejected if the IRS determines that the proposed resolution does not meet its requirements.
Complete information matters: Financial details and supporting documentation should be accurate.
Other options may be available: Installment agreements or Currently Not Collectible status may be considered when an OIC is not appropriate.
Reliable information and realistic expectations are essential when evaluating tax resolution options.
Finding The Right Path For Your Tax Situation
Settling IRS tax debt for less than the full amount owed generally means pursuing an Offer in Compromise, not simply negotiating an informal reduction with the IRS. The IRS considers specific eligibility requirements, the taxpayer's financial circumstances, and the applicable OIC basis before deciding whether to accept an offer.
Taxpayers should also consider alternatives such as installment agreements or Currently Not Collectible status when an OIC does not fit their circumstances. No tax resolution option guarantees a specific result, and eligibility or IRS approval should never be assumed.
Hikaru Services helps individuals understand complex tax situations and explore potential approaches based on their circumstances. Contact us today to learn more about available tax resolution options and how professional guidance may help you better understand the process.
