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Can I Really Settle My IRS Tax Debt for Pennies on The Dollar?

Michael S. Anderson Aug. 12, 2013

There May Not Be a Better Slogan Ever Invented. I Mean Who Wouldn't Want to Settle Their Debt for Just a Fraction of The Amount Owed.

The problem is that it may be overused. The pitch-person on TV and Radio promises to use a soothing voice, insider knowledge and secret negotiating skills to save you from years of pain while you pay back the IRS.

If only it were always so simple.

In real life, it isn't a simple thing to convince the IRS to settle for less than what it is owed. It requires a tremendous amount of analysis, planning, knowledge and work and it doesn't hurt to have a good set of facts on your side to begin with.

In order to settle the tax debt for less than what is owed you have to prove to the IRS that you don't have the assets and/or income to pay the debt off before the IRS Statute of Limitations period on collection runs out. If the IRS thinks that you have the money to pay the debt before that time period runs out, it won't settle. This is true whether I help you, you do it yourself, or you enlist the guy with the soothing voice.

The process the TV commercial is talking about is called in Offer in Compromise. It is just an agreement between you and the IRS to settle the debt for less than what is owed.

The agreement is reached only after those income and assets are reviewed very closely to determine what the IRS calls your “reasonable collection potential”. In order for it to review those income and asset numbers you have to supply a bunch of financial information that includes a financial statement, supporting documents and your signature given under oath that your disclosures are accurate.

As pre-conditions to the IRS' consideration of the Offer in Compromise, you must:

1. File all Tax Returns

2. Make all required estimated tax payments for the current year

3. Make all required federal tax deposits for the current quarter if you are a business owner with employees

If you have done the above and the IRS agrees that you can't pay all the debt back before the Statute period runs out, you should be able to convince it to settle for less than what you currently owe.

Most Offers in Compromise fail however.

Historically, the success rate has been less than 25%. Recent changes to the Offer Program have increased that acceptance rate somewhat. In any event, it is a very good idea to have your situation at least reviewed/analyzed closely by someone that has experience with the IRS Offer in Compromise Program.