If you are unable to pay your tax obligations in a timely manner or if paying your debts may cause financial hardship, you may request an offer in compromise. This is an agreement between the IRS and a taxpayer to settle a tax obligation for an amount less than the amount owed.
According to the National Taxpayer Advocate, compromise can be a time-consuming process. However, if the IRS does not reject, return or withdraw your offer within two years of the date it is postmarked, the offer will be accepted.
“The IRS may accept a payment settlement for less than the amount owed, but this option is intentionally not easy to qualify for, and anyone considering it should pass the pre-qualification tool,” Brannenkant said. “The factors considered are ability to pay, income, expenses and net worth.”
As Bronnenkant mentions, the IRS may agree to accept your offer if there is a “doubt about collectibility,” meaning you don’t have enough income or assets to pay off the balance in full. Another reason is if the IRS determines that repayment of the debt would cause serious financial hardship or would be unfair to the taxpayer.
Finally, the IRS may accept less than the full amount if there is a “liability doubt,” meaning you believe the debt is not in the correct amount.
Bronnenkant warns that if you are considering applying for a compromise, be sure to have all documentation ready to help you keep track of any payments you have made or to explain why you are unable to pay your debt in full.
“The IRS is currently working harder to improve the taxpayer experience,” he said. “They want to keep things moving forward and help people deal with their unique challenges.”
