Here’s How to Settle Your Tax Debt for Less Than What You Owe

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

This could help you breathe a little easier. 

The only thing worse than filing your taxes is finding out you owe the government at the end of it. Some people wind up with outstanding tax bills that are thousands of dollars. If you weren’t expecting to owe, you could have a hard time coming up with the cash you need before the tax deadline on April 18.

You could set up a payment plan with the IRS, but there’s another option that could help you settle your debt for less than what you owe. It’s called an offer in compromise. Here’s what you need to know about it.

How an offer in compromise works

In short, an offer in compromise is where you tell the IRS how much you can pay toward your tax debt without causing yourself financial hardship. The IRS will evaluate your offer and decide whether to accept or reject it. If it accepts, you’re off the hook for the remainder of your debt.

In order to be eligible for an offer in compromise, you must file all your necessary tax returns by the tax deadline — April 18, 2023 — and not be involved in an open bankruptcy proceeding. Small business owners must also have made all their estimated tax payments during the year. If you’re not sure whether you qualify for an offer in compromise, the IRS has a screener tool to help you find out.

To submit an offer in compromise, fill out Form 433-A. You’ll need to provide information about your finances, including your income, assets, investments, and debt as well as your household’s gross monthly income and average expenses. The IRS will use this information when deciding whether your offer is fair. You will also be required to submit copies of supporting documents to prove your claims. You can find the list of what you’ll need at the end of Form 433-A.

In addition, you’ll need to fill out Form 656. This identifies the tax year and type of tax you’d like to make an offer in compromise for. It also lists what your offer is and how you’ll pay it. You have two choices: You can make a lump-sum payment or you can make monthly payments, up to a certain amount.

When you submit your application to the IRS, you’ll need to enclose a $205 non-refundable application fee and your initial payment. This is 20% of your total offer in compromise if you’re doing a lump-sum payment or your first monthly payment if you’re doing periodic payments. But you may not have to do this if you meet the Low-Income Certification guidelines, which you’ll find on Form 656.

Once you’ve done this, you must wait to see what the IRS decides. It could either accept your offer or reject it.

What happens if the IRS accepts your offer in compromise?

If the IRS accepts your offer, you’ll receive a notice saying so. It will also instruct you on next steps. At this point, you would submit the remainder of your lump-sum payment or continue making periodic payments as directed until you’ve fulfilled your end of the agreement.

What happens if the IRS rejects your offer in compromise?

You’ll also receive a notice if the IRS rejects your offer in compromise. It may do this if it feels that you could pay more of your outstanding debt than your offer reflects. You are able to file an appeal within 30 days of receiving your rejection notice if you’d like to.

If that fails or you choose not to file an appeal, you’ll still be on the hook for your remaining tax debt. But it’ll be knocked down a little. The IRS automatically applies your application fee and any initial payment you sent in to your bill.

It’s important to note that just because your offer in compromise was rejected doesn’t mean you’ll have to pay the remainder of your debt all at once. The IRS also offers short- and long-term payment plans to help you pay off your outstanding tax debt over time by making automatic deductions from a linked bank account. Inquire about one of these options if you need a little more time to pay what you owe.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More