*The following article was updated in March 2024*
There’s not a lot scarier than owing money to the Internal Revenue Service (IRS). But the reality is most taxpayers will end up owing money to the IRS at some point in their life. But what happens when you cannot afford to pay your tax burden? I’m often asked the question: Can I settle with the IRS because I can’t afford to pay them? Here are some options for settling and paying the IRS.
Offer in Compromise
An Offer in Compromise is the closest to a settlement agreement with the IRS. It allows you to settle your tax debt for less than the full amount you owe. However, this is only available if you cannot pay your full tax liability, or doing so creates a financial hardship. The IRS looks at the following circumstances when considering giving you an offer in compromise:
- Ability to pay
- Income
- Expenses
- Asset equity
First, taxpayers should exhaust other payment options, such as payment plans, before applying for an offer of compromise. Additionally, not every individual is qualified for this payment option. Second, taxpayers should complete the Offer in Compromise Pre-Qualifier to confirm eligibility before going further.
If you are eligible, download and complete the form in the Offer in Compromise Booklet, Form 656-B (PDF). Along with the application, you will need to submit Form 433-A and Form 656(s), as well as all required documentation for the forms. There is a $186 non-refundable application fee and the initial payment (also non-refundable) is due for each Form 656.
If your Offer in Compromise is approved, you’ll need to decide on a payment option. The Lump Sum Cash payment option includes an initial payment of 20 percent of the total offer with the application, and the remaining balance due in five or fewer payments. You can also elect Periodic Payments. For this option, you submit your initial payment with the application and continue paying the balance in monthly installments until your debt is paid in full.
Payment Plans
The other, more common tax debt settlement option is a payment plan. Generally, the IRS will allow you to set up a streamlined payment plan with no lien filed under the following conditions:
- You owe $50,000 or less
- You demonstrate you can’t pay the amount you owe now
- You can pay off the taxes owed in three years or less
The first step in the process is to apply to the IRS for a payment plan. There are essentially four payment plans available:
Short-term Payment Plan – This plan is for taxpayers who can pay off their debt in 120 days or less.
Long-term Payment Plan – This is what’s known as an installment agreement. It’s for taxpayers who need more than 120 days to pay the amount, and the payments are taken through automatic withdrawals from your checking account.
Streamline Payment Plan – If your balance is below $50,000 the IRS will allow you to streamline your payment plan over 72 months with no financial information provided. Unfortunately, penalties and interest still will accrue until the balance is paid in full.
Balance greater than $100,000 – If your IRS balance is greater than $100,000 the IRS will require you to provide financial information including income and proof of expenses.
Qualifying for an Offer in Compromise can be a difficult task. Don’t attempt to navigate the IRS on your own. To lower your tax burden and get the best payment option for you, consult an experienced tax attorney or professional.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
