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Negotiating Tax Debt

The Internal Revenue Service (IRS) is very willing to accept a small fraction of the amount of tax you owe them as payment in full.  How little will they accept?  They have been known to accept $20 on a $1,000 tax bill.  They routinely accept $3,000 on a $15,000 tax bill.

If you can't or didn't pay all of the tax you owe, the IRS will accept either (1) installment payments (which aren't discussed in this section) or (2) an offer in compromise.  Ideally, you should submit an offer in compromise and try to get it approved so that you don't have to pay those nasty installment payments with penalties and interest attached for many months to come.

What is an offer in compromise? In a nutshell, an offer in compromise is a proposed settlement you make to the IRS where you agree to pay a portion of the debt you owe and the IRS accepts it as payment in full.  You can also get out of paying hefty penalties and interest.  In fact, if your case is deemed to be a "hardship" one, you can get out of paying most if not all of your tax debt.

And there is more good news -- a few years ago Congress held hearings on the IRS and determined basically that it was a very corrupt operation.   To improve the image of the IRS, taxpayer reform legislation was passed.  Now, the IRS is accepting significantly more offers in compromise every year. In fact, Congress asked the IRS to be very generous in approving offers in compromise.  The Senate's exact statement on the subject: "The IRS will adopt a liberal acceptance policy for offers-in-compromise to provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes."

In general, to qualify for an offer in compromise, the IRS must believe that (1) they can't collect the full amount from you or (2) there is some doubt about your liability for the debt.  The terms "collectibility" and "liability" are important -- the IRS will only accept an offer in compromise from you if (1) or (2) above is true.

Although the IRS is now very generous in approving offers in compromise, it doesn't mean that the IRS is a pushover and you can easily get out of paying your tax debt.  Your offer in compromise must include a statement giving the reasons why you can't pay the debt for financial reasons, or why you shouldn't pay the debt because you don't believe you owe it.  You are required to disclose information about your assets and liabilities and your monthly income and expenses, as well as submit a plan for paying off the settlement amount. 

How much should you offer?  Your offer should equal or exceed the equity you have in all of your assets.  Determining this figure can be a headache for you and might require the assistance of a professional.  Guidelines and schedules are available from the IRS at their website -- http://www.irs.gov.

More information about offers in compromise. If the IRS has already sued you, an offer in compromise is not an option that is available to you.  However, if you haven’t been sued and your first offer in compromise is rejected, you are allowed to appeal the rejection.  If your appeal is rejected, you can submit another offer in compromise.   In fact, you can submit numerous offers in compromise until one is approved.  If your offer is rejected, the IRS is required to offer you an installment agreement.

If the IRS accepts your offer, you are required to sign a contract pledging to pay your taxes for the next five years.  If you don't comply with that contract, you're in trouble.

Where can I get the necessary forms?  To submit an offer in compromise you must complete IRS Form 656 (instructions are included with the form).  You must also submit Form 433-A Collection Information Statement for Individuals or Form 433-B Collection Information Statement for Businesses.  These forms and information about offers in compromise can be searched and downloaded directly from the IRS website at www.irs.gov. 

Affect on collection activities.  An offer in compromise stops all collection activity by the IRS while it is pending (unless the IRS determines it's a delaying tactic to dispose of assets). In general, it takes the IRS six to nine months to process your offer-in-compromise and come to a decision.  If your offer is accepted, you have 90 days to pay unless other payment arrangements have been approved.

It is important to note that Congress now requires the IRS to comply with the Fair Debt Collection Practices Act. If an IRS agent is threatening, harassing or abusing you in any way, you can send them one of the sample letters on the topic that are included in this kit.


Next topic:  21 Sample Debt Negotiation Letters and Letters to Debt Collectors
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