Will the IRS Take a Settlement?
If you owe the IRS more money than you can afford to pay, you may be wondering … will the IRS take a settlement?
If you have any outstanding tax balance with the IRS, they expect you to go above and beyond to pay them back. To that end, the IRS possesses the ability to put a lien on your assets that prioritizes your debt to them above any other debts you have, and if push comes to shove, they can even levy (take) portions of your income and sell your property.
But when a taxpayer is in a situation where there is no feasible way to cover their debt the IRS, even after considering short-term and long-term financing options, they may be able to negotiate a settlement.
So, will the IRS take a settlement?
Explaining an Offer in Compromise
In the simplest terms, an offer in compromise involves you sending the IRS as much money as you can afford to send them over an agreed-upon period. While there are no guidelines for how long a payment plan under an offer in compromise should last, estimates of anywhere between half a year to a year are common.
During this time, you will put up as much money as you can to cover what you can afford, while continuing to pay any and all incoming taxes on-time.
The catch? You have to be quite honest about what you can afford.. The IRS will calculate your total reasonable collection potential (RCP), which is effectively what you can afford to pay them if you put every non-essential penny towards covering your debt, and if your offer does not match that RCP, they won’t consider it.
There are a few other factors to keep in mind when checking for eligibility.
Are You Eligible For an Offer in Compromise?
A shortlist of things to keep in mind when pursuing an offer in compromise with the IRS include:
- You need to be up-to-date on your tax returns.
- You need to have made any required estimated tax payments.
- There is an application fee ($205, not required for low-income cases).
- You must fill out Form 433-A (OIC) (individuals) or 433-B (businesses), as well as Form 656 (for more information, see the booklet).
- Your offer must coincide with the IRS’s estimate of your capability to pay (based on income, assets and asset equity, and expenses).
- You cannot file for an offer in compromise while going through bankruptcy proceedings.
Once you file for an offer in compromise, you will typically either:
- Send 20 percent of your proposed total payment with the offer itself, and pay off the rest over four to five lump-sum payments after the offer has been accepted, or;
- Pay off your proposed total payment on a monthly installment plan, sending the first month’s payment with the offer itself, and continuing to make monthly payments while the IRS deliberates.
Note: Those eligible for low-income certification need not send in their first payment with an offer in compromise. For more information about eligibility, please use the IRS’s OIC pre-qualifier and read up on OICs through their website.
Form 656-L, a Doubt As To Liability
Another avenue for getting some part or all of your tax debt written off is a doubt as to liability. This is effectively an offer in compromise that argues that you don’t really owe what the IRS says that you owe.
Through a doubt as to liability, you can appeal your current tax debt and present the evidence to refute what they argue to be your liability to the IRS. This is done via Form 656–L.
The IRS, Lawsuits, and the Courts
If you have good reason to sue the IRS – usually a penalty that you want to dispute, or if you find you have evidence and reasonable cause to refute a tax bill and argue the IRS caused you damages – there are options and avenues for you to pursue.
In general, lawsuits against the IRS are only an option in cases where a taxpayer has proof that they have incurred financial damages as a result of the IRS’s actions, specifically in cases where the IRS makes a mistake and charges you more money than it should.
This is exceedingly rare, but when it does occur, a taxpayer has the ability to go to court and seek payment for damages. You can either seek to file a lawsuit against the IRS through the Federal Court of Claims, or through the United States Tax Court.
There are a few major differences between the two, the biggest being that that tax court has much laxer requirements for filing a lawsuit (you needn’t pay any outstanding amounts), while suing through the federal court may potentially yield better results (but you must either countersue after first being sued by the IRS, or pay all fees and penalties and then sue for a refund).
Furthermore, you can be represented by a non-attorney in the United States Tax Court (such as a tax professional or a certified public accountant), but any case brought to the Federal Court of Claims requires that you either represent yourself or bring an attorney.
In both cases, there are deadlines and other rules to follow. The first and most important is the 90-day deadline for suing the IRS after receiving a notice for a penalty you consider false or inapplicable.
Should you manage to file a lawsuit against the IRS and have sufficient evidence to refute their penalties, chances are that they will seek to settle. However, again, it’s worth noting that this is an option that is rarely applicable – and when it is, you want to be prepared to deal with the IRS through a reputable legal team, and have plenty of evidence at hand to dispute whatever they claim.
In any case, receiving a hefty tax bill from the IRS is not always going to be the end of the world. There are cases when the IRS will settle for less than the full amount, and there are times when more aggressive measures may net you a better outcome. There are also plenty of times when your best bet is simply to negotiate with the IRS for a payment plan that will allow you to cover all fees and penalties in full, without forcing you into financial destitute. Every case is unique and requires an individual approach.