How to Negotiate with the IRS on Back Taxes

Offer in compromise

An offer in compromise is a settlement offer with the IRS. You can apply for a settlement and, if accepted, the amount you will owe is based on a calculation of your income and assets.

You must complete Form 656 with the IRS to apply, which lays out your income and basic living expenses. The amount that your income exceeds your basic living expenses is your “monthly remaining income.”

You’ll then list the value of all your assets, such as:

• Bank accounts
• Investments
• Property

If you are paying in full with your application, you will owe 12 months of remaining monthly income plus the value of your assets. If you’re requesting a payment plan, you will owe 24 months of your remaining monthly income plus the value of your assets.

When you apply, you must submit your first monthly payment and continue to make payments while your application is under review. If you already have an installment agreement in place, you can pause those payments while paying the offer in compromise.

» MORE: What is an offer in compromise?

“An Offer in Compromise is the best choice when you lack the income and equity in assets to pay off the balance owed,” said Stephen A. Weisberg, from The W Tax Group in Southfield, Michigan, “before the IRS must write off the debt ten years after it was assessed.”

However, according to Weisberg, few people qualify despite what the advertisements might say. “The IRS won't accept an Offer in Compromise if it can get more money from you through your equity in assets and a payment plan,” he said.

Payment plans

If you owe back taxes, the IRS is likely to accept your payment plan if you can pay off the debt within six years. If you owe less than $50,000, you can apply online. If you owe less than $10,000 and can pay it off in less than three years, your application may be automatically accepted.

Choose the monthly payment you want to make, as long as it pays the debt within 72 months. If you don’t select a payment, your payment will automatically be the amount of your debt divided by 72.

Your balance will continue to accrue interest while you pay it off, so it’s best to pay it off as quickly as possible.

If opting for an installment plan, always choose a monthly payment you are comfortable with. You don’t want to get behind on payments, and you can always pay extra if you have the money.

If you can pay off the debt within 180 days, you can set up an installment agreement for free. Otherwise, there’s a charge based on setup and payment methods.

Eligibility and pre-qualification

Below, we explore the eligibility requirements for installment agreements and submitting an offer in compromise. 

Offer in compromise eligibility

If you’re considering an offer in compromise, you can use the Offer in Compromise Pre-Qualifier tool to see if you might qualify. To qualify, you must have the following:

• All tax returns submitted
• A bill for at least one tax debt
• No open bankruptcy proceedings
• No outstanding estimated tax payments this year
• No outstanding federal tax deposits for the past two quarters if you’re a business owner

When you apply for an offer in compromise, you’ll also complete Form 433-A if you’re an individual or sole proprietor, or Form 433-B if applying for your business. With this form, you’ll submit your income and personal assets, such as checking, savings and investment accounts. It will also walk you through submitting your living expenses. A $205 fee applies.

How to calculate an offer in compromise

To calculate your negotiated debt:

1. Subtract your expenses from your income to get your remaining monthly income.
2. Multiply that by 12 if paying in full, or by 24 if making monthly payments.
3. Add this total to the value of your assets: This is the amount you’ll submit for your offer.

If this number is greater than the amount you owe, you aren’t eligible for an offer in compromise.

For example, if you have $2,000 a month left over after covering your basic expenses and $5,000 in savings, then you’ll submit a lump sum offer of $29,000.

($2,000 x 12) + $5,000 = $29,000

Or if you need to make payments, you’ll offer to pay off $53,000.

($2,000 x 24) + $5,000 = $53,000

Installment agreement

Installment agreements are easier to qualify for than an offer in compromise. To qualify for an installment agreement, you must have filed all tax returns. If you owe less than $50,000, you can apply online. Otherwise, you’ll need to apply via the mail.

When you apply, know the monthly payment you’re requesting. You’ll also need your payment method handy. Paying by direct debit is the cheapest option. Make sure you have your bank account and routing number to take advantage of this payment method.

IRS hardship programs

If you’re experiencing financial hardship, you may qualify for Currently Not Collectable status or a Partial Pay Installment Agreement.

Currently not collectible

If you’re unable to pay back taxes due to extreme hardship, the IRS may temporarily delay collection efforts.

To apply for an IRS hardship program, complete Form 433-F and either Form 433-A or Form 433-B. The IRS will then determine if you qualify. The IRS will regularly review your situation, typically about once a year, to determine if you’re still eligible.

Currently Not Collectible status protects you from collections when you would experience financial hardship by paying any amount to the IRS.

Partial pay installment agreement

If you don’t qualify for an offer in compromise but also can’t pay off the debt in a timely fashion using an installment agreement, you may qualify for a Partial Pay Installment Agreement.

“Partial Pay Installment Agreements are a great alternative when you don’t qualify for an Offer in Compromise.” Weisberg said. He explained that you’ll make a monthly payment, but never end up paying off the full debt before it’s written off.

“You don’t get the finality of an Offer in Compromise,” Weisberg said, “but you can still end up paying much less than the total amount owed.”

To qualify, you must have all your tax filings up to date, plus:

• Owe more than $10,000
• Make a monthly payment (but not high enough to pay the taxes owed within 10 years)
• Possess no assets that can be sold to pay the debt
• Be ineligible for an offer in compromise
• Not file for bankruptcy

To apply for a Partial Pay Installment Agreement, file Form 9465, Form 433-F and 433-A, or 433-B, along with a copy of your last tax return. The IRS will determine if your application is accepted.

» LEARN: Who qualifies for tax relief?

Tax forgiveness options

Besides the offer in compromise or installment agreements, you may qualify for penalty abatement to reduce what you owe. Bankruptcy may also be an option for tax forgiveness.

Penalty abatement

You may qualify for penalty abatement if you have a good history of tax payments for the past three years.

You can call the IRS and request penalty abatement. If you qualify, you’ll get your penalty removed. Or, if you’d prefer to make the request via the mail, file Form 843.

If you’ve been charged interest on the penalty that is later removed, the interest is also removed automatically.

Bankruptcy

Including your back taxes in your bankruptcy filing may eliminate the debt. To qualify, you must:

• File all tax returns for the previous four years.
• Stay current on filings and tax payments while your filing is being processed.
• File without the intention of evading taxes.

If you don’t file your returns or pay the current taxes due, your request may be denied.