Can You Negotiate Tax Debt With the IRS?

The Internal Revenue Service (IRS) offers pathways for taxpayers to address outstanding obligations, particularly for individuals and businesses experiencing financial hardship. Various programs are designed to help taxpayers find a manageable resolution to their tax liabilities, aiming to prevent undue financial strain while ensuring tax compliance.

Available Tax Debt Negotiation Programs

The IRS offers several programs to help taxpayers resolve their tax debt, each suited to different financial situations. These options are sometimes referred to as the “Fresh Start Initiative,” which made these programs more accessible.

One option is an Offer in Compromise (OIC), which allows certain taxpayers to settle their tax debt for a lower amount than what they originally owe. This program is generally available when a taxpayer demonstrates an inability to pay the full amount or when paying the full amount would create significant economic hardship. The IRS considers the taxpayer’s ability to pay, income, expenses, and asset equity when evaluating an OIC.

Another common resolution is an Installment Agreement (IA), which enables taxpayers to make monthly payments over a period of up to 72 months. This option is suitable for those who can afford to pay their full tax debt but require more time to do so. For individual taxpayers, streamlined installment agreements are available for those who owe up to $50,000. Businesses may also qualify for streamlined agreements if they owe up to $25,000 and can pay within 24 months.

For taxpayers facing severe financial difficulties, the IRS may classify their account as Currently Not Collectible (CNC). This status means the IRS has determined that the taxpayer cannot pay any of their tax debt due to a temporary inability to meet basic living expenses. While in CNC status, the IRS temporarily suspends collection efforts, though the debt, including penalties and interest, continues to accrue. The IRS typically reviews CNC cases periodically to assess changes in the taxpayer’s financial situation.

Preparing Your Financial Information for Negotiation

Negotiating tax debt requires presenting your financial situation to the IRS. This involves gathering specific financial data and completing designated forms, which the IRS uses to determine your ability to pay and evaluate eligibility for resolution programs.

You will need to compile details regarding your income, expenses, assets, and liabilities:
Income documentation should include all sources, such as wages, self-employment earnings, pensions, and investment income.
Expenses must detail necessary living costs, including housing, utilities, food, transportation, healthcare, and business expenses.
Assets should cover items of value, such as real estate, vehicles, bank accounts, and investments, with their market values and any outstanding loans.
Liabilities should list all debts, including mortgages, car loans, credit card balances, and other obligations, with creditor information.

The IRS primarily uses specific forms to collect this financial information:
Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, for individuals and self-employed individuals.
Form 433-B, Collection Information Statement for Businesses, for businesses.
Form 656, Offer in Compromise, when applying for an Offer in Compromise.
Form 9465, Installment Agreement Request, for those seeking an Installment Agreement.

These forms can be accessed from the IRS website or requested by mail. Complete all fields accurately. For instance, Form 433-A requires detailed sections on personal, household, employment, and income information, plus assets and liabilities. This provides the IRS with a clear picture of your financial capacity, allowing them to calculate your Reasonable Collection Potential (RCP), the amount the IRS believes it can collect.

Supporting documentation verifies the information on your forms. This may include pay stubs, bank statements, tax returns, and proof of expenses like utility bills or rent receipts. For assets, you might need vehicle titles, property deeds, or investment account statements. The IRS uses this data to evaluate your ability to pay, ensuring any proposed resolution is fair and realistic.

Submitting Your Negotiation Proposal

After gathering financial information and completing IRS forms, the next step is submitting your negotiation proposal. The method of submission can vary depending on the type of agreement you are seeking.

For an Offer in Compromise, submit the complete package, including Form 656 and supporting financial documentation (Form 433-A or 433-B), via mail to the IRS address in the instructions. An application fee, generally around $205, is often required, though low-income taxpayers may qualify for a waiver. Include this fee with your submission or pay separately as instructed.

For an Installment Agreement, apply online through the IRS website or mail Form 9465. For Currently Not Collectible status, direct contact with the IRS by phone or correspondence may be necessary after an initial collection notice. Ensure all completed forms and supporting documents are included.

After submission, anticipate a processing period that varies by case complexity and application volume. An Offer in Compromise can take several months. The IRS typically sends an acknowledgment of receipt and may contact you for additional information, clarification, or an interview during the review.

Managing Your Tax Debt Agreement

After a tax debt negotiation proposal is submitted and potentially approved or denied, ongoing responsibilities exist. Adhering to the terms of any approved agreement is important for maintaining the resolution and avoiding renewed collection actions.

If an Installment Agreement or Offer in Compromise is approved, taxpayers must meet ongoing obligations. This includes timely filing of all future tax returns and making all required payments. Failure to comply, such as missing payments or not filing subsequent tax returns, can lead to default.

In case of default, the IRS may resume collection actions, including levying bank accounts or wages, or placing liens on property. The original tax debt, plus accrued penalties and interest, becomes immediately due. The IRS may also periodically review the financial situation of taxpayers with an approved Offer in Compromise or Currently Not Collectible status to ensure circumstances have not significantly improved.

If a negotiation proposal is denied, taxpayers generally have the right to appeal. The appeal process involves requesting a review by the IRS Independent Office of Appeals, separate from the collection division. This provides an opportunity to present your case to an impartial party and potentially reach an alternative resolution.