DIY Guide: How To Settle With the IRS by Yourself
9 MIN READ
Published October 19, 2023 | Updated November 09, 2023
When you ignore tax debts, you may face serious penalties. It increases your overall debt due to the added interest and fees. Failing to pay your tax debt for too long can result in wage garnishment and liens.
You can pay off your tax debt in several ways, such as an installment plan or by settling your debt. If you’re wondering how to settle with the Internal Revenue Service (IRS) by yourself, start by learning more about Offer in Compromise, which allows you to reduce your total debt. It’s worth knowing that the IRS only accepts settlement offers when there is a reasonable expectation that you can’t pay the full amount owed.
Can You Settle With the IRS by Yourself?
Yes, it is possible to settle with the IRS by yourself, but only if you don’t have the income or assets to pay off the debt. If you have the means to pay, the IRS will not likely settle your debt for less than you owe.
When applying for an Offer in Compromise (OIC), you must submit the appropriate paperwork that reasonably proves that you cannot pay the full debt or demonstrate financial hardship. If any of these situations apply to you, settling with the IRS is possible.
Who Is Eligible?
The eligibility requirements will depend on the exact program you’re applying for. For most programs, one key requirement is that you must have filed all your tax returns. If you’re applying for an OIC, you’ll be eligible if:
- You can’t have an ongoing bankruptcy proceeding.
- You have filed your tax returns.
- You’re an employer and have made tax deposits for the current and last two quarters.
- You have a valid extension for the current year's return.
You can also use the Offer in Compromise Pre-Qualifier Tool to determine your eligibility and prepare your preliminary proposal.
Why Settle With the IRS by Yourself?
DIY IRS settlement may be challenging, but it’s possible. The IRS is willing to work with taxpayers to help them find a way to clear their debt. They want to recover what they can rather than get nothing.
Settling your debt with the IRS by yourself can help you save money that would’ve been spent on the services of a professional. Additionally, it allows you to control the process independently to choose the right program and determine an accurate amount you can afford to pay.
“If you want to set up a payment arrangement for what you owe the IRS, it's simple to do. But, if you find yourself in a situation where you can't afford to pay what you owe, hire a tax attorney to help you,” explains Teresa Dodson, a debt expert and the founder of Greenbacks Consulting.
What Are the Options?
Before delving into how to settle with the IRS by yourself, it’s important to understand your options.
Offer in Compromise (OIC)
An Offer in Compromise will allow you to settle your debt for less than you owe. If you owe a lot of back taxes and can’t afford to pay them back in full, make an offer to the IRS for what you can comfortably pay. If your tax settlement offer is accepted, you’ll have two ways to settle the debt. You can pay a lump sum or spread out the repayments over 24 months. If the IRS rejects your application, you can appeal.
The IRS will consider your sources of credit and net worth when evaluating the application. It will compare your income with monthly expenses to determine what you can comfortably pay each month. Your application must prove that you’re facing financial hardship or can’t afford to pay what you owe.
Installment Agreements (IA)
Installment Agreements are IRS payment plans that allow you to pay off your debt over a period. If you can’t afford to pay off the full amount at once, paying in installments can make repayments easier.
You must have filed all tax returns to be eligible for this option. Your total tax debt should not exceed $50,000 combined in tax, interest, and penalties to qualify.
You can apply for a payment plan online if you meet these eligibility criteria. If your debt exceeds the amount listed above, you must mail your application. Depending on the type of payment plan you choose, you may have to pay a fee of up to $225 to set it up.
Currently Not Collectible (CNC)
Currently, Not Collectible means you can’t repay your debt while paying for your living expenses. If the IRS approves your CNC status, it will stop wage garnishment, levies, and collection attempts. The amount you owe will continue to accrue interest and late penalties.
To be eligible, you’ll need to file your tax returns. The IRS may also request documentation related to your income, debt, employment, and expenses to assess your case. Your CNC status will remain until the IRS reviews your financial situation annually and determines that your financial situation has improved.
If you have received a tax penalty from the IRS, you may be able to request a waiver in certain situations. The first-time penalty abatement offers relief to otherwise compliant taxpayers.
Some of the most common tax penalties include failure to file, which is 5% of the amount you owe for each month your return is late, up to 25%. Failure to pay is a penalty you may have to pay when you don’t pay the taxes by the due date.
You can request a penalty abatement by following the instructions in the letter. If approved, you’ll receive another notice with the tax penalty removed. You can also appeal the decision if the IRS doesn’t accept your request.
Step-by-Step Guide To Settling With the IRS Solo
If you’re wondering how to settle with the IRS yourself, here’s a detailed step-by-step guide.
Step 1: Assess Your Tax Situation
You can’t settle your tax debt without fully understanding what you owe. You can request a full breakdown of your tax debt from the IRS. Once you have clarity about your debt, the next step is to assess your income, assets, and expenses.
Based on this information, you can determine how much money you have left at the end of each month to pay toward a debt settlement.
Step 2: Understand Tax Laws and Regulations
Familiarize yourself with tax laws and regulations to better understand your rights and options during settlement. The IRS offers several options to taxpayers who can’t afford to pay off their debt, ranging from payment plans and penalty abatement to settlement.
You’ll find more information about each option on the IRS website, including the eligible requirements, relevant forms, and the application process.
Step 3: Communicate with the IRS
Depending on which program you plan to apply for, there are different methods to contact the IRS.
- If you’re requesting a Currently Not Collectible status, call IRS at 800-829-1040.
- You can fill out an application online for an Installment Agreement.
- For a Partial Payment Installment Agreement, you must fill out Form 9465 and a Collection Information Statement and mail it to the IRS.
- For Offer in Compromise, you must fill out the Form 656 booklet and mail it with the relevant documents to the IRS.
Step 4: Negotiate a Settlement
If you’re hoping to apply for an Offer in Compromise, you can’t offer a random amount and expect the IRS to accept it. When negotiating a settlement with the IRS, you must determine the right amount using the Form 433-A.
The form offers necessary information about your income and expenses to determine how you’ll satisfy an IRS tax debt. The information you provide on this form will show if you can make a monthly payment or cannot afford payments now. Provide accurate information on this form to determine a negotiation amount.
Step 5: Submit Your Application
- Form 656 Booklet offers step-by-step instructions and the necessary forms to apply for an Offer in Compromise. If you’re applying for an Installment Agreement, you can fill out the online form and submit your application.
- For Offer in Compromise, your application package must include:
- Form 433-A if you’re an individual or 433-B if you’re a business.
- Form 656
- Initial payment for each Form 656
- Application fee of $205
Step 6: Stay Organized and Keep Records
Keep records of all your communications with the IRS throughout the settlement process. Maintain a file that includes all notices, statements, and letters you receive from the IRS. You should also keep a copy of your financial documentation and the relevant forms you filled out when submitting your application.
Step 7: Select a Payment Option
If the IRS accepts your settlement offer, you have two payment options to choose from:
- Lump sum cash: You can submit 20% of your total offer amount with the application. If the IRS accepts your offer, you’ll receive a written notice. You must pay the remaining balance in five payments or less.
- Periodic payments: You can submit the initial payment with the application. Continue to pay the monthly installments while your application is reviewed. If the IRS accepts your offer, you can continue making tax payments until you fully pay the debt.
When Should You Seek Professional Advice?
If you think settling your federal tax debt with the IRS is too complex or want to ensure the best outcome, it’s best to work with a tax attorney. The IRS does not readily accept Offer in Compromise, and proving that you qualify for OIC isn't easy.
Form 433-A is a complex form, and if it isn’t filled out completely or correctly, the IRS will reject your application. If you want to improve your chances of a successful income, working with a tax professional who can help with your case is best. Get a free consultation to determine the right course of action.
The Bottom Line on Settling With the IRS
Settling with the IRS by yourself may seem complex, but with the right information and preparation, you can navigate the process confidently. Consider the IRS to be your partner, not an opponent.
Ignoring your income tax debt may worsen your situation and lead to wage garnishment, tax levies, and penalties. In rare cases, you may go to jail for not paying taxes, especially if the IRS determines tax fraud. Settling your debt as soon as possible will allow you to avoid these penalties and provide immediate tax relief.