IRS Offer In Compromise: What It Is & How It Can Mitigate Tax Debt

If tax debt and threats from the IRS have been looming over your head (and your wallet), you’re not alone. In 2023, Americans owed an estimated $128 billion in tax debt, which is expected to increase in more recent tax years.

That’s the bad news.

The good news is that you don’t have to settle for living in debt. In fact, one of the easiest ways to pay off your debt is through an IRS offer in compromise.

Here’s what you need to know:

What Is An IRS Offer In Compromise?

Simply put, an offer in compromise happens when the IRS lets you pay off your entire tax debt for less than what you actually owe.

Depending on your circumstances, there are three types of offers in compromise that can be applied toward your tax debt if approved by the IRS.

• Doubt as to Collectibility (DATC)

The most common type of offer is a DATC, which means the government believes you will be unable to pay your debt in full and offers you a reduced rate instead.

• Fair Tax Administration

Even if you may technically be able to pay your full debt, this offer ensures that all taxpayers are treated equitably and fairly under the law.

• Doubt as to Liability (DATL)

Although less common, a DATL offer may be offered if you believe the total of your tax debt is incorrect.

Who Is Eligible For A Compromise From The IRS?

Of course, there are some limitations as to who may be eligible for these programs. Before you try applying for an offer in compromise, make sure you meet all of the following qualifications:

• You’ve received a bill from the IRS, and you’re ready to settle your debt.

• Your federal income taxes have been filed.

• You’ve already made any required federal tax deposits or estimated tax payments.

• You haven’t recently filed for bankruptcy.

Ultimately, the IRS is interested in settling debts that are collectible.

If you’re involved in a bankruptcy case or you won’t be able to pay off an offered settlement, you should explore other tax debt elimination options.

How Does An IRS Offer In Compromise Work?

After you’ve determined your eligibility, you can apply for an IRS offer in compromise, including proposing your own terms for the settlement. This means you’ll need to state exactly how much you can pay and how you plan to pay it during the application process.

If the IRS accepts your offer, you’ll be expected to pay your debt within a specified time frame. If, for some reason, your offer is rejected or you’re still not able to pay off your debt, initiatives like the IRS Fresh Start program are here to help you get back on your feet.