One of the most common questions I get is whether IRS tax debts can be settled for less than the amount owed. The simple answer is yes…..if you qualify. The program that allows you to settle your tax debt is called the Offer in Compromise program. When you hear all these TV and radio ads talking about settling your tax debt for “pennies on the dollar,” they’re talking about the Offer in Compromise program. I don’t like those ads because they can often be a bit misleading. Although I’ve handled plenty of Offer in Compromise applications, I don’t like to tell people that they can always settle their tax debt at a discount because there are many times when the IRS won’t accept an Offer in Compromise application.
The first hurdle for most people to clear when submitting an Offer in Compromise application is making sure that the person is in “current compliance” with IRS laws. In simple terms, this means that you will need to have all past due tax returns filed, make estimated quarterly tax payments if you’re self-employed, and accumulate no new tax debt. If you can get yourself into current compliance, the IRS will review your Offer in Compromise application to see if you are a good candidate for a settlement of back taxes.
The next area for the IRS to review will be your financial information. If you’re making good money and/or have assets that could satisfy your tax debt, you may have difficulty getting your Offer in Compromise approved. For the majority of people, the Offer in Compromise program works when you do not have the financial resources to satisfy your tax debt. If you have the resources to satisfy your tax debt, the IRS will not want to settle at a discount, unless there are extraordinary circumstances that would justify a settlement. Once you submit your Offer in Compromise application with your financial information (via what the IRS calls a “Collection Information Statement (Form 433-A),” they will determine your “reasonable collection potential” (“RCP”). The RCP is the amount the IRS believes you can pay over a given period of time. If your RCP is less than the amount owed, you may be in a position to settle your tax debt at a discount.
Settlement amounts vary greatly, and the amount or percentage of settlement is based on your specific financial situation. In other words, just because I settled one person’s tax debt at a penny on the dollar, that doesn’t mean that you’ll get the same deal. Each case stands on its own merits. Contact me today to see if you might qualify for the Offer in Compromise program and to discuss other important details of the program.