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Settling Old Tax Debt for Less Using IRS Programs

Settling Old Tax Debt for Less Using IRS Programs

If you owe back taxes to the IRS, it can be super stressful trying to figure out how to pay it all off. The good news is, you may have options to settle your tax debt for less than you owe through IRS programs like the Offer in Compromise. This article will explain the different ways you can potentially reduce or pay off your back taxes over time.

What happens if you don’t pay your taxes?

Well, nothing good unfortunately. If you don’t file your tax return or pay your taxes, the IRS will send you notices demanding payment. If you ignore those notices, the IRS can take more serious collection actions like:

  • Garnishing your wages so a portion of your paycheck goes toward your tax debt
  • Putting a levy on your bank account to seize funds
  • Filing a federal tax lien against your property

The IRS will also charge penalties and interest on unpaid taxes, which keeps adding to your balance due. So it’s important to take action if you have back taxes you can’t pay in full.

What are your options for settling IRS debt?

The IRS provides several potential options for resolving tax debt depending on your situation:

Payment plans

If you owe $50,000 or less, the IRS may approve a payment plan that allows you to pay your balance due over 6 years or less. This can make your tax debt more manageable by spreading payments out over time. The IRS charges lower penalties and interest as long as you stick to the payment schedule.

There are short-term payment plans for balances under $100,000 that must be paid off in under 72 months. You may also qualify for a “guaranteed” installment agreement if you owe less than $10,000. This is easier to obtain as long as you’ve filed on time and paid your taxes for the previous 5 years.

Offer in Compromise

An Offer in Compromise allows you to settle your tax debt for less than the full amount owed. The IRS may accept an offer if you can prove one of these situations:

  • You don’t have enough assets and income to pay your tax debt in full
  • Paying your tax debt would cause “economic hardship”
  • There’s doubt you actually owe the amount due

The IRS looks at your unique financial situation to determine if you qualify for an OIC. This involves submitting detailed financial information and supporting documentation. Offers can be “lump-sum” payments or paid over 5-6 years.

Currently Not Collectible status

If you truly can’t afford to make any payments toward your tax debt, the IRS may put your account into Currently Not Collectible status. This pauses IRS collection efforts and penalties, but interest continues to accrue.

To qualify, you’ll need to show you have less than a certain amount of income after paying necessary living expenses. This status doesn’t reduce your balance due, but buys you time until your financial situation improves.

Penalty abatement

The IRS may agree to reduce penalties like the failure-to-file or failure-to-pay penalties if you have a reasonable explanation. For example, serious illness or a death in the family are situations the IRS may consider for penalty relief.

You’ll need to demonstrate that the circumstances were beyond your control and that you did your best to comply with tax laws. Abating penalties can help lower the total amount you owe.

How much can you settle for with the IRS?

If approved for an Offer in Compromise, the IRS determines a “reasonable collection potential” based on your assets, income, expenses and future earning potential. This is the maximum they’ll accept to settle your tax debt.

For example, if the IRS calculates you can afford to pay $6,000 based on your financial situation, that’s likely to be the offer amount they’ll accept. It could allow you to settle a $20,000 tax debt for only $6,000.

Accepted OICs exempt you from paying the remaining balance, which can reduce your tax debt by 50% or more in some cases. But the IRS rejects most OIC applications, so meet with a tax pro to improve your chances.

Can you settle your tax debt yourself?

You can absolutely try settling with the IRS on your own through their programs. But it can be complicated completing all the forms and providing documentation correctly.

Getting professional help maximizes your chances of qualifying for tax relief options like Currently Not Collectible status or an accepted Offer in Compromise.

A tax relief firm, CPA or tax attorney experienced in IRS negotiations can:

  • Review your situation and determine the best options
  • Make sure you complete IRS forms properly
  • Help compile supporting financial documents
  • Communicate with the IRS on your behalf
  • Negotiate a favorable settlement

Just make sure to choose a reputable tax relief company and beware of scams. A good sign is if the company offers a money-back guarantee if they don’t successfully lower your tax debt.

The bottom line

Dealing with IRS tax debt can be overwhelming. But you have options like payment plans, penalty relief and the Offer in Compromise to make repayment more affordable.

Partnering with a tax professional experienced in IRS procedures can help navigate the process and maximize your chances of settling for less. It’s possible to resolve tax debt in a way that works for your budget, but taking action quickly is key.

With some strategies and persistence, you can take control of your tax situation again and reduce the stress of owing back taxes. Don’t wait – you’ll feel so much relief when you have an affordable plan to pay off the IRS.


[1] – Offer in Compromise

2 – How to Settle Your IRS Tax Debt

3 – An Offer in Compromise May Help Settle Tax Bill

4 – Topic 204 Offers in Compromise

LendEDU – How to Settle Tax Debt with the IRS

NerdWallet – Tax Relief for Back Taxes

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