Will the IRS Take a Lump Sum Settlement? Your Complete Guide to Tax Debt Resolution

Are you drowning in tax debt and wondering if there’s a way out? Many taxpayers find themselves asking “Will the IRS take a lump sum settlement?” The short answer is yes—but there’s much more to the story

If you’re struggling with overwhelming tax liabilities, the IRS Offer in Compromise (OIC) program might be your lifeline. This program allows eligible taxpayers to settle their tax debt for less than the full amount owed. But before you get too excited, you should know that the approval process is selective, with a success rate of only about 3655%

I’ve helped a lot of people get through this difficult process, and I’m going to tell you everything you need to know to get an IRS lump sum settlement.

What Exactly Is an Offer in Compromise?

An Offer in Compromise is essentially an agreement between you and the IRS that allows you to settle your tax debt for less than what you actually owe. This option can be a game-changer if you’re facing significant financial hardship or if paying your full tax debt seems impossible.

The IRS doesn’t just hand these out like candy, though. They’ll carefully evaluate your financial situation, including your income, expenses, asset equity, and ability to pay before making a decision.

Are You Eligible for an Offer in Compromise?

Before investing time and energy into applying, you should check if you meet these basic eligibility requirements:

• You’ve filed all required tax returns
• You’ve made all required estimated tax payments
• You’ve received a bill for at least one tax debt included in your offer
• You’re not in an open bankruptcy proceeding
• You have a valid extension for the current year return (if applying for the current year)
• If you’re an employer, you’ve made tax deposits for the current and past two quarters

The IRS website has a helpful Pre-Qualifier Tool that can help you figure out if you’re eligible and make a preliminary proposal. Before you start the full application process, this can save you a lot of time.

How Does the IRS Evaluate Your Offer?

When deciding whether to accept your offer, the IRS considers three main factors:

1. Doubt as to Liability

This applies when there’s a genuine dispute about whether you actually owe the tax debt or the amount is incorrect. Maybe the tax law is unclear in your situation, or perhaps there are factual errors in the IRS’s calculations.

2. Doubt as to Collectibility

This is the most common basis for an OIC. If your assets and income aren’t enough to cover your full tax debt, the IRS may accept a lower amount. They’ll look at your “reasonable collection potential” – what they could realistically expect to collect from you over time.

3. Effective Tax Administration

Sometimes, even if you could technically pay the full amount, it would be unfair or would put you in too much financial trouble to do so. In these rare situations, the IRS might accept an offer if it means they can handle taxes well.

The Application Process: What You’ll Need

If you think an OIC might be right for you, here’s what you’ll need to submit:

• Form 656: Offer in Compromise
• Form 433-A (OIC): Collection Information Statement for individuals
• Form 433-B (OIC): Collection Information Statement for businesses (if applicable)
• $205 application fee (non-refundable, but waived for low-income taxpayers)
• Initial payment (varies based on your payment option)

The Offer in Compromise Booklet, Form 656-B, which you can find on the IRS website has all of these forms and full instructions.

Lump Sum vs. Periodic Payment: Which Should You Choose?

When submitting an OIC, you have two payment options:

Lump Sum Cash Offer

With this option, you pay 20% of your total offer amount when you submit your application. If the IRS accepts your offer, you’ll pay the remaining balance in five or fewer payments within five months of acceptance.

For example, if you offer to settle $50,000 in tax debt for $10,000, you’ll need to send $2,000 (20% of $10,000) with your application. If accepted, you’ll pay the remaining $8,000 within five months.

Periodic Payment Offer

With this option, you submit your initial payment with your application and continue making monthly installments while the IRS reviews your offer. If accepted, you’ll continue monthly payments until the amount is paid in full, typically within 24 months.

Most folks find the lump sum option more appealing because it’s over quicker and often results in a lower total payment. But the periodic payment option might be better if you don’t have enough cash for the 20% initial payment of a lump sum offer.

What Happens While the IRS Reviews Your Offer?

The IRS review process can take several months or even longer. During this time:

• Your non-refundable payments and fees are applied to your tax debt
• The IRS may file a notice of federal tax lien
• Other collection activities are suspended
• Your legal assessment and collection period is extended
• You must make all required payments according to your offer
• You don’t have to make payments on existing installment agreements

An interesting fact: if the IRS doesn’t make a determination within two years of receiving your offer, it’s automatically accepted! (This doesn’t include any appeal period, though.)

If Your Offer is Accepted

Congratulations! Now you need to:

• Follow all the terms listed in Section 7 of Form 656
• File all required tax returns and make all payments on time for the next five years
• Understand that the IRS won’t release federal tax liens until you’ve satisfied all offer terms

If Your Offer is Rejected

Don’t lose hope! You have options:

• Appeal the rejection within 30 days using Form 13711, Request for Appeal of Offer in Compromise
• Work with the IRS Independent Office of Appeals, which offers additional assistance
• Consider other payment options like an installment agreement

Other Options If You Don’t Qualify for an OIC

If an OIC isn’t in the cards for you, there are other ways to handle your tax debt:

• Installment Agreement: Pay your debt in monthly installments over time
• Currently Not Collectible Status: If you can prove severe financial hardship, the IRS may temporarily stop collection activities
• Penalty Abatement: In some cases, the IRS may remove penalties from your tax bill
• Bankruptcy: In rare situations, certain tax debts can be discharged in bankruptcy

Real Talk: Is an Offer in Compromise Right for You?

I’m not gonna sugarcoat it – getting an OIC approved isn’t easy. With an acceptance rate of only 36.55%, most applications get rejected. The process can also be lengthy and complex.

However, for those who qualify, an OIC can provide significant relief. I’ve seen clients settle tens of thousands in tax debt for pennies on the dollar when their financial situation truly warranted it.

Before you apply, consider consulting with a tax professional who specializes in tax resolution. They can help determine if an OIC is your best option and guide you through the application process to maximize your chances of approval.

Important Things to Remember

• The IRS will continue applying your non-refundable payments to your tax liability even if your offer is rejected
• You can designate which tax year and which tax debt your payments are applied to
• While your offer is being considered, the IRS suspends collection activities but may still file a tax lien
• Low-income taxpayers may qualify for a waiver of the application fee and initial payment
• Your tax returns must be filed and current before applying

FAQ About IRS Lump Sum Settlements

Will the IRS definitely take a settlement amount?

The IRS can take your settlement check to offset unpaid taxes, but they don’t automatically accept all settlement offers. Each case is evaluated individually based on financial circumstances.

How likely is the IRS to accept an offer in compromise?

The current success rate is about 36.55%. Your chances improve if you meet all eligibility requirements and can demonstrate that you truly cannot pay the full amount owed.

Is it possible to negotiate with the IRS?

Yes! The IRS can accept a compromise when there’s doubt as to liability or doubt that the amount owed is fully collectible. They may also accept compromises for effective tax administration in special circumstances.

What is the IRS 6-year rule?

If you don’t report income that you should have reported, and it’s more than 25% of the gross income shown on your return (or it’s attributable to foreign financial assets and is more than $5,000), the time for the IRS to assess tax extends to 6 years from when you filed.

How much do you have to pay for a lump sum offer?

Generally, you’ll need to pay 20% of the total amount you’re offering when you submit your application. The rest must be paid in five or fewer payments within five months of acceptance.

Final Thoughts

Dealing with tax debt can be overwhelming, but you have options. An Offer in Compromise might be your path to a fresh financial start if you truly cannot pay your full tax liability. The key is understanding the process, meeting all requirements, and being realistic about your financial situation.

Remember to file your tax returns on time even if you can’t pay in full – this keeps your options open and prevents additional penalties. And if you’re uncertain about the best approach, consider getting professional help from a tax resolution specialist.

Have you tried negotiating with the IRS before? I’d love to hear about your experiences in the comments below!