How to Settle Tax Debt with the IRS
There are many IRS debt settlement options to choose from, including some that reduce your total balance owed. If you're looking to settle IRS tax debts, make sure you choose the right option for your financial scenario.
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If you owe back taxes to the IRS, there are ways to settle these debts directly through the agency. Some of these options allow you to reduce your total tax liability, while others spread the balance out over time, making repayment more manageable.
The IRS doesn’t make it easy to reduce your debt, so it’s important to make sure you choose the right settlement option. Here’s what you need to know about tax settlement with the IRS.
On this page:
- What happens if I don’t take care of my tax debt?
- What options do I have for settling my IRS debt?
- How much will the IRS settle for?
- Can I settle with the IRS myself?
What happens if I don’t take care of my tax debt?
Taxpayers who ignore tax debts can face serious penalties. For one, it increases the overall costs of your taxes by adding fees and extra interest to your balance. Late fees start at 0.5% of the tax debt, while interest comes in at the federal short-term rate, plus 3%.
If the balance goes unpaid too long, the government will even start garnishing your wages (taking money from your paychecks) and filing liens and levies against your home, car, and property. Eventually, that could lead to losing these assets altogether.
Your credit also takes a hit when you fail to pay your tax debts, especially if the IRS has sent the bill to collections. This would mean a lower credit score and a harder time securing a mortgage, car loan, or even credit card.
Fortunately, if you’ve already started seeing some of these consequences, getting on a repayment plan with the IRS may be able to help reduce them (or even negate them altogether).
Find Out If a Tax Relief Company Can Help With Your Debt
What options do I have for settling my IRS debt?
There are several routes you can take to settle your tax debts with the IRS. The only sure-fire way to reduce your total balance, though, is through an Offer in Compromise. Unfortunately, this tends to be challenging to come by.
Other options allow you to settle your debts through installment payments, spread out over many months or years. It’s important to note that these typically do not reduce your total debt burden.
Offer in Compromise (OIC)
An Offer in Compromise allows you to settle your tax debts for less than you owe.
Here’s how it works: You make an offer for what you can comfortably afford to pay (based on your assets, income, expenses, and other financial details), and the IRS will accept or reject it. If accepted, you’ll have two payment options to choose from (including one that spreads the repayment out over 24 months) and can begin settling your debts. If your offer is rejected, you’ll have the option to appeal, though this doesn’t guarantee you’ll be successful.
To be eligible, you need to have all your tax returns filed and have made any required estimated payments. You can use this pre-qualifying tool to see if you’re a good fit.
If you do qualify, you’ll need to fill out and submit a Form 656 booklet. To determine your offer, you’ll either need to do one of the following:
- Multiply your monthly income, minus expenses by 12 and then add in your total assets OR
- Multiply your monthly income, minus expenses, by 24 and then add in your total assets
The first option must be paid off within five months and the second in six to 24 months.
Offers in Compromise evaluations typically take around six to seven months to process and, unfortunately, come with low success rates. According to the 2019 IRS Data Book, the agency received 54,225 OICs last year but accepted just 17,890 of them — an acceptance rate of only 33%.
Partial payment installment agreement
There’s a chance the IRS’ Partial Payment Installment Agreement (PPIA) program can help you settle your debt for less, though that’s a big “if.” With PPIAs, the IRS agrees to accept smaller payments spread out over an extended period. During that repayment term, the IRS reserves the right to review your finances. If the agency finds that your financial situation has improved, it can increase your payment or begin taking other measures to collect on the original debt.
Before you can be eligible for a PPIA, you’ll need to use all assets to try and repay your debt. The IRS can also ask that you use the equity in those assets (like your home equity, for example) to pay off the balance.
To apply for a PPIA, you’ll need a Collection Information Statement and a Form 9465, and like with OICs, you’ll need to have your returns filed and any estimated payments made. You will also need to agree to financial reviews every two years.
Installment agreements are generally easier to qualify for than OICs, but they’re still not a given. During your application process, the IRS may also request additional documentation, like bank statements or other financial paperwork, to prove you can’t pay more. If the IRS deems you can, your application could be rejected.
Installment agreements, also called payment plans, are a way of paying off your existing tax debt but spreading it out over an agreed period of time — anywhere from a few months to six years.
As with other options, your taxes have to be filed to be eligible. But beyond that, there are no other qualifications. If you want to apply for your installment agreement online, you’ll need to have a total tax balance of $50,000 or less (for the long-term plan) or $100,000 or less (120 days repayment or less).
A quick note here: Depending on what IRS payment plan you choose and how you intend to pay your installments, you’ll owe anywhere from $0 to $225 to set up your payment plan.
Not currently collectible
Currently Not Collectible is an account status option with the IRS. It simply means that you currently do not have the financial capabilities to repay your tax debts and cover your basic living expenses simultaneously.
If you’re approved for CNC status, the IRS will stop all collections attempts, wage garnishments, and levies. Your account will still gain interest and be subject to late penalties, though.
Like other settlement options, your tax returns will all need to be filed to apply for CNC. You will then need to contact the IRS directly at 800-829-1040 to see if you’re eligible. The agency may request documentation regarding your income, employment, debts, monthly expenses, and other financial details while assessing your case.
The IRS will review your income annually to see if your financial situation has improved and you can resume repaying your debts. If not, your CNC status will remain, and all collections efforts will stay on hold.
File for bankruptcy
Your last and final option would be Chapter 7 bankruptcy. With this type of bankruptcy, you can discharge income tax debts at least three years old. You also have to be current on your tax return filings.
Be careful, though: Bankruptcy can’t wipe clean all debts — nor does it work with tax liens. If the IRS has already filed a lien against your house, car, or other assets, you’ll still need to pay it off (or sell the assets) before it can be removed.
Additionally, bankruptcy does come with some costs. You’ll need to pay filing fees, hire a bankruptcy attorney, and potentially pay for bankruptcy counseling classes as well. On average, it costs between $1,500 and $4,000.
Recap of IRS tax debt settlement options
Offers in Compromise and PPIAs are typically your best bets if you know there’s no way you can pay your tax debt in full — no matter how many months it’s spread out over. If you have a few hundred dollars a month that you could potentially put toward your debts, then an installment agreement may be best.
If you’re facing a short-term financial hardship, consider filing for Currently Not Collectible status until you get back on your feet or, if your tax and other debts have gotten too out of hand, bankruptcy may be a better option.
|Offer in Compromise||Tax debts very far out of reach|
|Partial Payment Installment Agreement||If the payment on a traditional installment plan is out of reach|
|Installment Agreement||If you can afford your tax debt spread out over time|
|Currently Not Collectible Status||Short-term financial hardship|
|Bankruptcy||If you have overwhelming tax and other debts|
How much will the IRS settle for?
The IRS will typically only settle for what it deems you can feasibly pay. To determine this, it will take into account your assets (home, car, etc.), your income, your monthly expenses (rent, utilities, child care, etc.), your savings, and more.
The average settlement on an OIC is around $5,240. For installment plans (all types), it’s about $4,964.
Can I settle with the IRS myself?
You can absolutely settle your tax debts directly with the IRS, though it often requires many forms (and documentation) and tends to be a complicated process. See below for the forms you’ll need for each.
|Offer in Compromise||Form 656 booklet|
|Partial Payment Installment Agreement||Form 9465, plus a Collection Information Statement|
|Installment Agreement||Online or Form 9465, plus a Collection Information Statement|
|Currently Not Collectible Status||Must call IRS directly at 800-829-1040|
|Bankruptcy||Must file a petition through the court system or seek an attorney’s assistance|
If this seems too complex to handle solo — or you just want to ensure your best chance at success, then you can also call in a tax relief company or tax attorney.
Tax relief firms typically employ tax professionals and attorneys to help with your case. See our guide to the best tax relief companies if you’re considering this option.
Author: Aly Yale