If you cannot pay what you owe, the IRS may accept less than the full amount of your outstanding tax debt.
Generally there are two ways you can pay less than the full amount the IRS says you owe:
The Offer in Compromise
There are three kinds of Offers in Compromise:
A. Doubt as to Collectibility – If you don’t have enough assets and excess income (after living expenses) to pay the debt in full, you may qualify for an offer in compromise based on doubt as to collectibility.
B. Doubt as to Liability – If you have enough assets and income to pay the debt in full, but believe that you do not owe the full amount, you may qualify for an offer in compromise based on doubt as to liability.
C. Effective Tax Administration – If the circumstances of your debt and your ability to pay are such that a settlement would further the administration of the tax laws, you may be able to pay less than the full amount you owe. This is called an offer based on effective tax administration.
Penalty and Interest Reduction
The IRS assesses penalties against taxpayers for willful failure to comply with the tax laws. If you can show that your failure to comply was not willful, but, rather due to reasonable cause, the IRS is required to reduce or eliminate the penalties.
If the IRS caused the delays in your payment of your tax debt, then you are entitled to a reduction of any interest charges.
IRS Settlements are Difficult, But Not Impossible to Obtain
It is not a simple matter to get the IRS to accept less than the full amount of the tax, penalties and interest that a taxpayer owes. If you think you might qualify for an IRS settlement, it is wise to seek the advice of experience tax counsel.