Ins and Outs of Settling With the IRS

It isn’t easy to settle your tax debts for less than you owe, but it is possible. Here is what taxpayers need to know

Here is an idea that probably sounds like a guaranteed waste of time: Ask the Internal Revenue Service to settle your tax debts for less than you owe.

By Tom Herman

For most people, that may sound far-fetched. But for some people drowning in debt or struggling with other seemingly insurmountable financial woes, persuading the IRS to accept a compromise offer may not be as hopeless as it seems.

While the IRS isn’t known for its generosity, it is authorized by law to compromise under certain circumstances. For example, the IRS “generally” will accept a compromise offer “when the amount offered represents the most we can expect to collect within a reasonable period,” says Eric Smith, an IRS spokesman. A compromise is a possibility if “you can’t pay your full tax liability, or doing so creates a financial hardship,” the IRS says on its website.

But getting to “yes” can be stunningly complicated and time-consuming. Filling out the application, collecting documentation and waiting for an IRS response can require extraordinary patience. “It’s typically a long haul due to the unfortunate underfunding of the IRS by Congress and the process the examiners must go through to analyze each offer,” says Fran Obeid, an attorney at MFO Law, P.C., in New York City.

Critics say the IRS could make the program more user-friendly, including responding more quickly to offers and being less stingy. The IRS has said that determining someone’s “reasonable collection potential” is a “complex and nuanced topic,” and that it has made improvements, including posting more information on its website. Officials also say they are reviewing the subject and will consider changes based on the findings.

Here are answers to some questions readers may have.

How many compromise offers does the IRS receive in a typical year, and how many are accepted?

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