How Much Will The IRS Usually Settle For?
Key Takeaways:
An Offer in Compromise is an agreement between a taxpayer and the IRS to settle their tax debt for less than what is owed.
Eligibility for an offer in compromise depends on a person’s financial status and ability to make tax payments, income level, monthly living expenses, and personal asset equity.
To qualify for an offers in compromise, taxpayers must meet the requirements of being up to date on filing their tax returns and submitting all estimated tax payments, not being involved in an open bankruptcy case, and already having a valid extension for the current tax year’s return.
Employers must submit the required federal tax deposits for all employees monthly or semi-weekly, including federal income tax, Social Security tax, Medicare tax, and taxes from all wages, tips, and other forms of compensation.
Self-employed individuals must make required estimated tax payments as they earn money throughout the year to avoid penalties, including income tax, self-employment tax, and other types of taxes such as alternative minimum tax.
To check if you may fall within low-income certification guidelines you can compare your adjusted gross income (AGI) found on IRS Form 1040 or IRS Form 1040-SR with the amount on Form 656 that corresponds to your location and family size.
Settlement payments to the IRS can be submitted all at once in a lump sum or periodically through an installment agreement.
No matter where you find yourself with your accumulated tax debt, it is important to remember that the IRS ultimately wants to collect payment for what is owed. During the circumstance in which paying what you owe in unpaid back taxes would place you in financial hardship, the IRS may be willing to settle to align the reasonable collection potential with a sum that will allow you to afford your basic living expenses based on your monthly disposable income. In exchange for settling the debt for a lower amount, the IRS requires a lump sum settlement.
There are many numbers you can find online that express previous success stories with an IRS offer, however, average settlement amounts mean nothing to the individual taxpayer whose situation will be completely unique. Although it can be difficult to find an exact answer when exploring your tax relief options through an offer in compromise, if you read on, you can learn how the IRS calculates settlement allowances and who might be eligible for this form of tax relief.
Calculating How Much Will The IRS Settle For
When calculating what you should offer to the IRS, there is an IRS formula you can utilize to estimate an initial offer. The Offer in Compromise Pre-Qualifier Tool that is available for free on the IRS website is a user-friendly method that taxpayers can utilize to figure out if this form of tax debt relief is suitable for their situation. Within this tool, you will answer a series of questions about your financial information and tax filing status to calculate a preliminary offer amount.
What happens while the IRS considers an offer in compromise?
If you have submitted or are in the process of submitting an application for an offer in compromise, it is beneficial to understand the process of how the IRS evaluates your offer.
- All of the non-refundable payments and fees that you make will be applied to the unpaid tax liability.
- You may have the option to designate which tax year or tax debts these non-refundable payments are applied towards.
- The IRS may issue a notice of a federal tax lien to place a legal claim on your assets as a way to secure payment for tax debt.
- The IRS will suspend other collection activities while evaluating your offer.
- Your legal assessment and collection period will be extended while your offer is being considered.
- You will be required to make all required estimated tax payments as listed in your offer.
- If you are applying for an offer in compromise, you will not have to make payments on other existing installment agreements while your offer is being considered.
- If the IRS is unable to respond to your offer in compromise within two years of the IRS receipt date, your offer will automatically be accepted. However, this two-year period does not include an appeal period.
Offer in Compromise
For most individuals who find themselves struggling to afford their tax bills, an offer in compromise program may be the most beneficial form of tax debt relief offered by the Internal Revenue Service. If you qualify for an offer in compromise, the IRS may agree on a tax settlement for less than what you owe, so instead of paying back the total tax debt initially recorded on your tax bill, you can agree to pay the more manageable amount in the settlement.
This tax obligation relief program is sometimes also referred to as the government tax negotiation program because entrepreneurs and individual taxpayers struggling to pay their back taxes can agree to settle on a tax payment so that they can still afford their allowable living expenses.
Who is eligible for an offer in compromise?
The Internal Revenue Service evaluates several aspects of a taxpayer’s financial situation when determining their eligibility for an offer in compromise. Some of the factors that will be evaluated during this eligibility analysis include:
- Financial status and ability to make payments
- Income level
- Essential living expenses and financial responsibilities
- Personal asset equity
While the IRS can appear to be a scary entity that is trying to take every last dollar you earn, if you are reasonable when negotiating with the IRS, they will approve your offer as a way to collect your tax debt. When negotiating offers in compromise, if the IRS determines that your minimum offer is the highest amount that you could reasonably pay within a certain time period, it is likely that they will accept your settlement.
Aside from your financial status, there are other factors regarding your taxpaying history that the IRS will consider when evaluating your request for tax relief. Taxpayers are eligible to apply for an offer in compromise if they meet the following requirements:
- They are currently up to date in filing all tax returns and submitting all estimated tax payments
- They are not currently involved in an open bankruptcy case
- f you are applying for the current tax year and you have a valid extension already for a current year's return
- As an employer, you are up to date in submitting all tax deposits for the current quarter and the past two quarters at the time you apply.
If you apply for an offer in compromise but the IRS denies your offer, you will be returned the application fees and any offered payment you included in your application will be applied toward your balance due.
The only way you can determine your eligibility for an offer in compromise is to apply, so if you believe you fall under these qualifications, consult a tax attorney at Ideal Tax for assistance in your tax relief applications.
How likely is it to be approved for an Offer in Compromise program?
Out of all the forms of tax debt relief that the IRS provides for taxpayers who are struggling to pay their back taxes, an offer in compromise is one of the most difficult programs to be approved for. In fact, less than 1 in 3 applicants will be approved for an offer in compromise.
However, taxpayers who consult a tax professional tend to have more success in the negotiation process because they understand what the IRS is looking for in an application and have a clear understanding of whether or not the taxpayer meets the requirements.
The IRS may deny your offer for one or more of the following reasons:
- Your financial status indicates that you can afford to pay your tax bill in full
- In the past, you have filed for bankruptcy
- You have a legal record of committing fraud or another criminal act
- You have negotiated an installment agreement with the IRS within the past 5 years
- The total debt is less than $10,000
- You can currently afford to pay less than what you owe in a lump sum payment
Even though the likelihood of qualifying for an offer in compromise program to settle your tax debts may be lower than finding tax relief through another program, utilizing online tools or consulting a tax professional can help you determine your eligibility.
Required Tax Payments
What are required federal tax deposits?
Employers are reporting employment taxes through a federal tax deposit either monthly or semi-weekly. The taxes that must be reported include federal income tax, Social Security tax, and Medicare tax for both the business owner and all employees within the company, and this must include all wages, tips, and other forms of compensation.
For most wage employees, every time they receive a paycheck, a certain percentage of their earnings will be withheld to contribute toward their estimated tax for the year. When wage earners file their tax returns during tax season, they will use Form W-4. Wage employees can modify how much of their income is withheld from each paycheck to alter how much they owe or are refunded when they file their tax returns. If they paid too much in estimated tax payments, they will receive a tax refund. If they did not pay enough, they will owe money to the IRS at the time of submitting their tax returns.
What are the required estimated tax payments?
Self-employed individuals or other non-wage employees are usually responsible for making required estimated tax payments during the tax year. Because they are not having tax payments withheld from their paycheck like a wage employee, they must make their own tax payments throughout the tax year as they earn or receive income. Those who do not make estimated tax payments throughout the year or who are late in making required estimated payments may be subject to penalties from the IRS.
The required estimated payments you make contribute to income tax, self-employment tax, and other types of taxes such as alternative minimum tax, and paying these IRS estimates regularly can help you manage your finances and overall owe less to the IRS.
How do you know if you qualify for low-income certification?
There are specific guidelines that taxpayers can check to see if they may qualify for low-income certification. First, you must check your adjusted gross income (AGI) as listed on IRS Form 1040 or IRS Form 1040-SR of your most recently filed tax return.
If your AGI comes out to be less than or equal to the appropriate amount listed on Form 656, Section 1, for where you live and your family size, you may fall within the low-income certification guidelines. If taxpayers do not qualify for low-income certification based on their AGI, they have the option to request a waiver.
It can be helpful to know that taxpayers who qualify will not be responsible for making payments toward the application fee when you apply or during the consideration process.
Payment options for offers in compromise settlements
When negotiating with the IRS to settle your tax debt, you will present an initial payment within your offer. There are two payment options when you are negotiating an offer in compromise:
Lump Sum Cash Offer
If you are requesting to settle your debt through a lump sum cash offer, you will submit 20% of the total offer amount as an initial payment with your application. If the offer is accepted, you will receive written confirmation from the IRS, and you will be required to pay the remaining balance due within five or fewer payments.
Rather than paying your debt back over time through small installments, a lump sum payment is a large sum that is paid back in a single payment. If you made an offer in regard to your tax debt and the IRS approved that amount, a lump sum payment can be one of the most efficient methods of settling with the IRS. The longer you have tax debt, the more interest and penalties the sum will accrue over time that you will owe to the IRS. Therefore, if you can afford to make a large payment all at once, you can manage your tax burden more quickly than by adding installment payments to your monthly expenses.
Periodic payment offer
As opposed to a lump sum cash offer where the taxpayer submits a large quantity of the funds owed to the IRS, a periodic payment offer in compromise involves submitting an initial payment and then proceeding to submit monthly payments while you wait for the IRS to consider your offer. In the case that the IRS does accept your offer, you will continue to make payments in monthly installments until the tax debt is paid in full.
Paying the IRS periodically within a payment plan is called an installment agreement. Within an installment agreement, taxpayers have an extended timeline during which they will submit regular payments toward their tax debt. When the IRS agrees to a payment plan, the taxpayer is generally safe from receiving a tax lien or levy in the attempt to collect tax payments.
Should you hire tax professionals when trying to settle with the Internal Revenue Service?
Taxpayers are not required to hire tax lawyers or other tax professionals when negotiating with the IRS for an offer in compromise, however, there may be some circumstances where it can be beneficial. In general, if your tax debt adds up to less than $5,000, the best approach is likely to contact the IRS directly to try and reach a deal quantity. While a tax professional can be helpful, the cost of onboarding a professional tax relief firm will likely surpass the savings you could achieve through a settlement.
On the other hand, if you are concerned about receiving a tax audit or your tax bill is substantial, a tax attorney can provide step-by-step instructions to negotiate your IRS offer until you reach an offer that the IRS accepts.
Living with tax debt is stressful, especially when your tax liability only increases over time as a result of interest, fines, and penalties. If you are ready to manage your IRS debt once and for all, applying for an offer in compromise is one of the most effective methods to settle your tax debt with the IRS. Instead of paying your total tax bill that would place you in economic hardship, the IRS can agree to a settled amount that is compatible with your monthly income and monthly living expenses.
If you are ready to find out if the IRS will settle your tax debt, meeting with tax attorneys and other tax pros is the best strategy to understand your financial situation and create an actionable plan to pay back what you owe in taxes. Contact us at Ideal Tax for a free consultation today.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
