Is tax debt negotiable? Yes, but it’s complicated

If you file your tax return and expect a refund, but instead find out you owe money, your first instinct may be to scream, curse, or cry. And while you may be resigned to having to empty your savings account (assuming you have the money), you may be wondering if it’s possible to get the IRS to forgive your debt or accept a reduced amount.

Well, in some cases, yes. In rare cases, the IRS will accept an offer in compromise, which is an agreement to settle your tax bill for less than the full amount owed.

To be clear, for most people, a compromise offer won’t work. But here are three scenarios in which your compromise offer could blow up:

1. I have doubts about whether I have to pay taxes.

If you have major doubts about whether you actually owe the taxes the IRS says you owe, you may be able to get out through an offer in compromise. Typically, a thorough investigation of the matter is required before the IRS chooses this route. And in most cases, there is no question about whether you should or should not pay the money back to the IRS.

2. There is no tax to pay.

The IRS may agree to an offer in compromise if you are unable to pay the tax debt you are seeking to recover. Let’s say you suffer an injury and have been unable to return to work for several years. In that situation, you may argue that the IRS may forgive the tax or agree to a smaller amount because it would not be reasonable to ask you to pay that tax debt.

3. When payment of taxes causes significant and undue hardship

The final scenario in which an offer in compromise may work is if you can demonstrate that (depending on your financial situation) having to pay the tax debt would create an undue burden on you. But the IRS said that if a compromise is to be accepted, it must make clear that “requiring full payment would be unfair or inequitable due to economic hardship or exceptional circumstances.”

What should I do if I owe money to the IRS and can’t pay?

If you file a tax return and discover that you owe taxes to the IRS, don’t assume that you will be able to negotiate your tax debt. It almost never works. Instead, if you don’t have the savings to pay the full amount, sign up for an installment agreement where you pay the taxes over time.

It’s really important to sign up for one of these when possible rather than just sending IRS funds randomly. If you are on a payment plan and make your scheduled payments, you are considered current and the IRS will generally stop tracking your wages for reimbursement. If you don’t take that action, the IRS may think you’re blowing your tax bill and try to garnish your wages instead.

if you is If you’re thinking about making a compromise offer to cover a big tax bill, consult a tax professional before you spin your wheels. They may be in a good position to know whether you should go down this path or not.

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