IRS Debt Settlement Guide

People who have tax debt can sometimes settle the debt for much less than they owe. There are two ways to do this. You can ask for a direct settlement called an Offer in Compromise, an OIC or simply, an offer. You can also ask for a penalty abatement that reduces or eliminates the fines on your tax debt. Depending on the circumstances, people can reduce their tax bill to a fraction of what they originally owed.

Offer in Compromise Qualifications

To qualify for an OIC, you must have a reasonable reason for not being able to pay your tax bill in full. A common reason is long-term financial hardship that will not allow you to pay the bill. Many people fall into this category if they have become physically or mentally handicapped and are no longer able to work. Some people may be able qualify for an OIC if personal or familial problems such as drug or alcohol addiction, abuse or divorce have created large burdens. You will have to provide describe your hardship to the IRS and include documents to back up your story including doctor's statements or other official documents.

Applying For an Offer in Compromise

To begin the OIC process, fill out the Offer in Compromise Form 656 and the Collection Information Statement Form 433-A. If you are married and live in a community property state, you will have to include your spouse' information on these sheets as well. You will have to pay a $150 application fee unless your income is below the poverty line. In this case, you must include the Application Fee Worksheet included in the Form 656 paperwork. Finally, you will have to send the IRS a multitude of financial documents including tax forms, bank account statements, pay stubs and statements from unearned income sources such as investments, Social Security, Unemployment and Workers Compensation. When you offer a compromised payment amount, be aware that the IRS will likely reject an offer that is too low according to you financial records. Make sure you offer a fair amount to increase your chances of having the offer accepted. You may appeal a rejected OIC but unless your circumstances have changed or you offer a different offer amount, the IRS will probably not find in your favor.

Penalty Abatement

Penalty abatement allows you to lower the fines on your debt or eliminate them completely. Since fines can take up a large portion of your total tax bill, it may be prudent to attempt a penalty abatement. Although it isn't easy to convince the IRS you should not have to pay your fines in their entirety, the IRS may grant your request if you had major personal issues when you got into tax debt. Possible scenarios include divorce, theft or loss of financial documents serious illness, incarceration, incorrect tax advice from a professional, long periods of unemployment and natural disasters. Fill out Form 843 to start the process and request a interview in person if you believe it will help your case.