How to Negotiate the Amount Owed to the IRS
- 1). Estimate your reasonable collection potential (RCP). This is how the IRS measures your ability to pay your tax debt. It includes the value of real property that you own (real estate, automobiles and other property), as well as bank accounts. It also includes a calculation for future income (minus basic living costs). If this amount is lower than your tax debt you might qualify for an Offer in Compromise (OIC). See References for additional information about calculating the RCP.
- 2). Review the three reasons why the IRS awards OICs. An OIC is an appeal to the IRS to lower your tax debt. An OIC will be awarded if the debt appears to be uncollectible, if there's doubt on the assessed tax liability, or if there is an "exceptional circumstance," such as economic hardship, unfairness or inequitable treatment.
- 3). Determine the best solution for you. Go through your expenses and income and see what amount you can afford to pay the IRS on a monthly basis.
- 4). File Form 656, Offer in Compromise. The filing fee for the OIC application is $150. You must include two separate payments with your application: the $150 filing fee, and the first installment according to the payment schedule you are proposing. If your proposal is accepted, you will be expected to make all future payments as scheduled. Failure to do so will result in reinstatement of your original tax bill, and the IRS will resume collection efforts.
- 5). Send the form to the appropriate IRS center, as directed in the Form 656-B Offer in Compromise Booklet. The state in which you live and the source of income on which you owe the taxes determine where you send your application and future payments.
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