Taxpayers who have significant debt for a tax single year, or tax debt spread over multiple years, will often enter into an installment agreement. But there's another option if you have the funds to make an adequate lump-sum payment, even if it's just a portion of what you owe.
An offer-in-compromise is essentially an agreement negotiated between you and the IRS. It allows you to resolve existing tax debt by making a significant one-time payment. Many taxpayers are able to settle their IRS tax debt for less than half of what they actually owe, and this process also saves the IRS time and money spent trying to collect the whole sum over a longer period of time.
If you wish to make an offer-in-compromise, there are a few restrictions. First, the level of tax debt you have must well exceed your financial resources and your ability to pay. In other words, if it's unlikely the IRS will ever collect the full amount owed based on your income level and the value of your assets, the offer is more likely to be accepted. Second, you must pay the maximum amount the IRS determines that you can afford, once your resources and situation have been reviewed.
While the basic premise of the offer-in-compromise is simple enough and it seems like a great option for taxpayers, there are some obstacles that prevent people from taking advantage of this form of tax resolution.
Proving the tax debt imposes an unfair economic hardship, which will also affect the taxpayer's ability to pay down the debt over time, can be challenging. Disputing the amount owed may be time-consuming and frustrating too, and of course pulling together the minimum dollar amount required to make an offer the IRS will accept is difficult for some taxpayers. Having a tax expert in your corner and guiding you through the negotiation process is one way to help ensure your offer will be successful.
Once you and the IRS do come to an agreement on a lump-sum amount, after you submit that payment your debt is satisfied and the IRS will take no further action to collect.