Q: Sir, We are having a very difficult time trying to pay my taxes that we owe the IRS, currently at a total of approximately $12,888.00 for two years, 2010 and 2011. I have made arrangements with the IRS and am making a payment of $100 per month for a period six years for the first period, which owe I believe 2010 $4,200. The second period is 2011 and is owing at $8,600 and the IRS is asking for double the monthly payment for six years which we cannot afford. I have already used everything that I have available in paying off other bills. My wife has a 401(k) that she can take out $5,000 against this. Is there any way the IRS could possibly take this and call it even? Would they consider this as a settlement for back taxes? -- Dirk, Folsom, CA
A: It is possible to settle taxes owed to the IRS for prior years through an "Offer in Compromise" agreement. The IRS may settle tax debts if there is either doubt as to liability or doubt as to collectibility. You will find step-by-step instructions for submitting an Offer in Compromise in the IRS Form 656-B booklet. An article about the Offer in Compromise process can be found on the IRS website. The IRS also has a video available on their website titled "Complete Form 656."
You will have to provide extensive information regarding your assets, liabilities, income and expenses as part of the application process. Two forms are used to submit this information, IRS Forms 433-A and B. You will also have to pay a non-refundable $150 fee and an initial payment toward the tax liability.
Many people seek professional help in preparing Offers in Compromise. Be wary of "offer mills" that advertise "too good to be true" results. It is best to find a tax professional who has experience with preparing Offers in Compromise and can help you work through the IRS review and acceptance process.