“How much will the IRS accept to settle tax debt?” is a common question for people with back tax issues. The IRS will agree to settle back tax debt in cases where a person is unable to pay back the tax debt in full within the time allowed by law. IRS tax settlements are often accomplished through use of the Offer in Compromise program (also sometimes referred to as the Fresh Start Program). In order to qualify to settle IRS tax debt under this program you must have filed all required back tax returns and be remitting the proper amount of tax for the current year. Additionally, how much the IRS will accept is based on Reasonable Collection Potential (RCP) which is explained in more detail below.
What is Reasonable Collection Potential?
The amount to offer the IRS to settle tax debt is based on a calculation involving a person’s net assets, monthly income, and monthly expenses. Examples of net assets include retirement and investment accounts, equity in a home or vehicle, and cash in the bank. Examples of expenses considered include food, clothing, housing, utilities, vehicle ownership and operating costs, life insurance, daycare, and child support to name a few. The Reasonable Collection Potential is then calculated by subtracting monthly expenses from monthly income and then multiplying the result by 12 or 24 (see below). This number is then added to the net assets referenced above. Note that the IRS has certain limits on amounts which can be claimed for certain expenses per their allowable standard guidelines.
How Much to Offer the IRS to Settle My Tax Debt?
The IRS offers two options for how to pay the amount of your offer. The first option requires that you pay 20% of your offer amount upfront and then remit the remainder of the offer within 5 months from the date that an Offer in Compromise is accepted. The second option doesn’t require the 20% upfront deposit but instead requires the first payment to be paid with the submission of the offer and for the remaining amount to be paid within 6 to 24 months in accordance with your proposed offer terms. The formula to calculate your offer is below depending on which option is chosen.
- Option #1: (Lump Sum) = (monthly income – allowable monthly expenses = net income x 12) plus net assets = Offer Amount
- Option #2: (Monthly Payments) = (monthly income – allowable monthly expenses = net income x 24) plus net assets = Offer Amount
Note some taxpayer can qualify to submit an offer without paying a deposit or monthly payments.
Can I Just Pay the Actual Taxes Due and Not Interest and Penalties?
Will the IRS agree to settle if I can pay them back all of the taxes and not the interest and penalty? Unfortunately, the answer is no despite how logical this proposition seems. Interest and penalties are imposed by law to incentivize people to timely pay their taxes each year. With limited exceptions, interest and penalties cannot be removed. Settling outstanding tax debt is most often accomplished by pursuing an Offer in Compromise. However, other options to settle do exist in the form of partial pay installment agreement for example.
In closing, you can settle your tax debts with the IRS if you can demonstrate that you are unable to pay back the amount of tax, interest, and penalty in full and you submit an offer based on a Reasonable Collection Potential that is lower than the amount owed.
Video Reference: https://laurenmassie.com/reasonable-collection-potential/
About the Author:
Lauren Massie, CPA, EA, MBA resides in Raleigh, North Carolina. The primary focus of her CPA practice is income tax representation for individuals who need tax help with the IRS or the North Carolina Department of Revenue. She regularly assists clients with issues such as unfiled tax returns, back taxes, wage garnishments, bank levies, installment agreements, and the filing of an Offer in Compromise to settle tax debts. Have questions? Lauren can be reached directly at (919) 792-8511 or through this link.
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Lauren Massie
Lauren Massie, CPA, PLLC
8480 Honeycutt Road, Suite 200
Raleigh, NC 27615
(919) 792-8511
Lauren Massie, CPA, PLLC is based in Raleigh, North Carolina and serves clients throughout the Greater Triangle Area including cities such as Wake Forest, Durham, Cary, Chapel Hill, Morrisville, Holly Springs, Fuquay-Varina, Clayton, Louisburg, Knightdale, Zebulon, Rolesville, Wendell, Hillsborough, Youngsville, Franklinton, Garner, Zebulon, Henderson, Franklinton, Holly Springs, Creedmoor, and Angier.