Every year that a person does not pay the IRS the amount of money that they owe, penalties and interest will accrue on the unpaid balance. After many years, this person can likely end up with a debt to the IRS they are not able to pay. Without some sort of intervention, the amount owed will continue to compound every year. One way out of this situation for taxpayers is through what is called Offers in Compromise.

Offers in Compromise is an agreement between a taxpayer and the IRS to settle a tax liability by paying less than the full amount owed. Through this plan, the taxpayer can pay off some of the money from penalties and interest that had been added to their original bill. The goal of the Offer in Compromise is for the IRS to collect what is reasonable at the earliest possible time and at the least cost to them.

A Offer in Compromise may be accepted by the IRS for one of three reasons: If there is doubt that the amount the person owes can ever be paid back in full; if there is doubt that the amount of tax owed is correct (here the taxpayer must explain why they believe they do not actually owe the tax); or if the taxpayer believes that, due to certain circumstances, it would be unfair for the IRS to require full payment.

The criteria for the Offers in Compromise program focuses on the taxpayer’s ability to pay. The IRS considers what the taxpayer’s ability to pay the tax debt over a five-year period is. They may forgive some of the tax debt if the ability to pay is less than what is owed. The debt can then be reduced to a level that the person is able to start paying. In order to qualify, the IRS will look at a person’s expenses in one month, including housing costs, medical expenses, alimony and child support, food, clothing, and transportation costs. If the person’s total expenses are greater than their monthly after-tax income, they should qualify for the program.

If the Offer in Compromise is accepted, the person may pay with cash, a short-term deferred payment plan, or a long-term deferred payment plan. The taxpayer must remain in compliance with all filing and payment obligations and not incur any new tax debt for five years or until the offer amount is paid, whichever is longer.