Tax Negotiations: How to Settle Your IRS Debt

Tax negotiations are formal processes allowing taxpayers to resolve outstanding liabilities with the Internal Revenue Service. For individuals or businesses who cannot pay their full tax debt, these arrangements can provide a path toward compliance and financial stability. The process involves a detailed review of a taxpayer’s financial situation to determine a feasible resolution. Agreements are not guaranteed and depend on the taxpayer meeting specific eligibility criteria.

Understanding Tax Relief Options

An Offer in Compromise (OIC) is an agreement to settle tax debt for less than the original amount owed and is for those experiencing considerable financial difficulty. The IRS evaluates eligibility by calculating a taxpayer’s reasonable collection potential based on income, expenses, and asset equity. Acceptance rates for OICs are low, as the taxpayer must demonstrate a clear inability to pay the full amount now or in the future.

A more common resolution is an Installment Agreement (IA), which establishes a monthly payment plan to satisfy the full tax debt over time. For tax debts below certain thresholds, taxpayers may qualify for a streamlined agreement with minimal financial disclosure. Larger debts require a more detailed financial statement to determine an affordable monthly payment. An IA involves repaying the entire liability on a structured schedule, preventing further collection actions as long as payments are made.

For taxpayers facing severe economic hardship, the IRS may grant Currently Not Collectible (CNC) status. This is a temporary designation where the agency pauses collection efforts because an individual’s income is insufficient to cover basic living expenses. CNC status does not eliminate the tax debt; penalties and interest continue to accumulate. The IRS will periodically review the taxpayer’s financial situation to see if their ability to pay has improved. Many state tax authorities offer similar relief programs, though their specific rules and eligibility requirements will differ.

Required Information and Forms for Tax Relief

Preparation for tax negotiations begins with compiling financial information. A taxpayer must gather documentation for all income sources, including recent pay stubs, W-2s, 1099s, and records of any self-employment earnings. A detailed list of monthly living expenses is also needed, supported by bank statements, utility bills, and mortgage or rent statements.

A complete inventory of all assets and liabilities is also necessary. This includes providing current statements for all bank accounts, investment and retirement accounts, and valuations for any real estate or vehicles. The taxpayer must also list all outstanding debts, such as mortgages, auto loans, and credit card balances, along with supporting statements showing the total amount owed and minimum monthly payments.

The specific forms required depend on the relief sought. For an Installment Agreement or to be placed in Currently Not Collectible status, the IRS requires a Collection Information Statement, which is Form 433-A for individuals or the shorter Form 433-F. To formally request an IA, taxpayers mail Form 9465, Installment Agreement Request.

Applying for an Offer in Compromise requires Form 656, Offer in Compromise, and a specific Collection Information Statement: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. The IRS recognizes three grounds for an OIC: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. Submitting Form 656 requires a non-refundable application fee and an initial payment, though both may be waived for taxpayers meeting low-income certification guidelines.

The Submission and Negotiation Procedure

Once all forms and documents are gathered, the application package is submitted to the IRS. For an Installment Agreement, an online application is available for individuals who owe a combined total of $50,000 or less in tax, penalties, and interest. A short-term payment plan of up to 180 days can be requested online for balances under $100,000.

After the application is submitted, the taxpayer should expect to receive a letter from the IRS acknowledging receipt within a few weeks. The case is then assigned to an IRS employee for a review process that can take several months. The agent will analyze the submitted financial information, verify income sources, scrutinize bank statements, and use public records to confirm property values.

This verification stage often leads to a back-and-forth negotiation. The IRS agent may request additional documentation or clarification on the Collection Information Statement. For example, if claimed monthly expenses exceed the IRS’s established local standards, the taxpayer will need to provide justification for the higher costs. The final terms of any agreement will be based on this verified financial data.

Maintaining Compliance After an Agreement

Securing an agreement with the IRS requires strict adherence to its terms to keep it in good standing. For an Installment Agreement, this means making every monthly payment on time and in the full amount. For an Offer in Compromise, the taxpayer must pay the settlement amount according to the accepted terms.

A requirement for all post-resolution agreements is future tax compliance. Taxpayers with an approved OIC or IA must file all future tax returns on time and pay any new tax liabilities in full. For an OIC, this compliance period lasts for five years from the date the offer is accepted.

The consequences of defaulting are significant. If a taxpayer fails to make payments or remain current on future taxes, the IRS can terminate the agreement. When an agreement is voided, the original tax debt is reinstated in full, with all previously abated penalties and interest added back, and the IRS can resume collection actions like liens and levies.