Can't Pay IRS Tax, IRS Will Settle For Less?

Would that it were…unfortunately, while you have stated one of the grounds on which the IRS may settle a tax debt for less than payment in full, the IRS is not obligated to do so. Instead, whether or not you can get your tax liability reduced depends on the outcome of an IRS debt negotiation—i.e. you need to convince the IRS that it’s in their interest and/or the interest of simple fairness (yes, the IRS does try to be fair) to allow you to settle your debt for something less than full payment.

A favorable IRS debt settlement is called an Offer in Compromise or OIC. The three grounds for it are:

• The taxpayer can’t pay the full debt—the IRS decides that it’s better to get half a loaf, by compromising, than hold out for whole loaf and risk getting nothing.
• There’s some doubt as to the tax liability—since there’s some reason to think that the taxpayer might not in fact owe the full amount, the IRS basically decides to “split the difference” and accept partial payment as guarantee, rather than try to win big, but potentially lose big, too.
• It wouldn’t be fair to make the taxpayer pay the whole tax bill—this often comes up in medical or dependent-care contexts, when the taxpayer has a legitimate and morally overwhelming need, such as to pay for the care of a sick or disabled child.

However, it must be stressed that the bar is very high: the IRS does not like accepting less than full payment; and since they don’t have to, the taxpayer must be very persuasive to have an OIC accepted. Experienced tax counsel can help you understand if getting an OIC is reasonable likely, as well as maximize your chance (such as by negotiating with the IRS) of a successful outcome.