Strategies to Reduce Your IRS Debt

If you owe the IRS a significant amount of money, you likely have already given thought to not only how you can pay it, but if there are any ways that you can reduce the amount of the debt.

As for the latter concern, before you involve yourself with a third party tax debt "specialist" or any firm that promises big and advertises even bigger, know that the IRS offers various programs directly to taxpayers in order to help them deal with an otherwise unmanageable tax debt.

Offer in Compromise

Under certain circumstances, if you are unable to make a full-payment over a reasonable amount of time, or if you feel the assessed tax liability is incorrect and can prove otherwise, you can offer a lower amount to the IRS, who then may accept it as a compromise.

The Offer in Compromise (OIC) program has been around for many years, and is going nowhere. This contrasts to the "penny-on-the-dollar" hawkers and the tax firms that would make you believe that the IRS is offering a one-time settlement window only. Any such programs refer only to the OIC program, which is designed for taxpayers to file and submit themselves.

An OIC can be filed under Doubt as to Liability, meaning that you can substantiate why the amount you owe is not correct, or Doubt as to Collectability, meaning that you understand why you owe but financially you are not able to pay it in full.

You can also file an OIC under Effective Tax Administration, which essentially takes cases that do not fall into the above two categories.

For more information on the OIC program, see the related articles 10 Things You Didn't Know About the IRS Offer in Compromise Program and When to File an Offer in Compromise with the IRS

Partial Payment Installment Agreements

Back in 2005, the IRS installed a program that allowed a taxpayer to pay less than the full amount they owe, in monthly installments, over the remaining amount of time left on the 10-year statute to collect. This is called a Partial Payment Installment Agreement (PPIA).

Prior to this legislation rolling out, taxpayers that could not pay their outstanding tax liabilities in full would only be allowed to enter into an agreement with the IRS if the agreement resulted in full payment of the liability. This left taxpayers with only limited payment options.

Before granting a PPIA, the IRS conducts a detailed financial interview, and substantiation of income and expenses may be needed. If a taxpayer shows the ability to full pay the balance using assets on hand, or if there is a strong likelihood that the IRS can recoup full-payment over time, a PPIA will generally not be considered.

Abatement of Penalties

The IRS can grant relief from certain penalties (but not interest) if Reasonable Cause is met.

The IRS defines reasonable cause relief as a reprieve available when a taxpayer exercises ordinary business care and prudence in determining their tax obligation, but is unable to comply with those obligations due to circumstance beyond their control.

The most common penalties that are abatable under this provision are the Failure to File Penalty and the Failure to Pay Penalty.

If a taxpayer can demonstrate that a situation prevented them from filing on time or from making timely efforts to contact the IRS to discuss repayment options, the IRS will consider removing the penalties in full or in part. Common reasons for the removal of penalties would by the loss of tax records in a fire or flood, or a catastrophic medical emergency.

For more information see the IRS Penalty Appeal page.

More from this Contributor:

An overview of the penalties and interest charged by the IRS

What if the IRS files a Notice of Federal Tax Lien on my house?

What questions should you ask before choosing a tax preparer?