Checklist: Settling Your Back Taxes

If you owe back taxes to the IRS that you don’t think you’ll be able to ever pay off, you may have an option to settle what you owe the IRS with an “Offer in Compromise.” This is simply an offer to settle for a smaller amount than what you owe.

If you’re considering doing this, you’re going to need a lot of information on hand, whether you submit it yourself or with the help of an accountant specializing in tax debt resolution. Here’s what you should gather before you start:

  • Any correspondence from the IRS. Did the IRS send you notices in the past concerning tax bills you were unable to pay? Have you ever received a notice of a levy or that they were going to seize your property to satisfy the debt? Find any and all IRS letters and keep them accessible.
  • Proof of current income, or lack thereof. You may be able to qualify for a low-income waiver when initiating the process, and your historical, current, and future income is going to be considered when making an offer. If you are making significantly less income than you had been, or your income has halted, you should provide up-to-date proof.
  • Previous tax returns and proof that you filed them. In order for an Offer in Compromise to pass, you need to be up-to-date on all outstanding tax returns. Even if you can’t afford to pay the taxes associated with each open tax year, make sure that you’ve filed those returns first and have proof handy that you submitted them.
  • A thorough list of all of your assets. The IRS needs to know the value of your assets and whether they could be used to satisfy your tax debt. This includes financial assets like bank accounts, retirement accounts, CDs, and home equity, as well as other assets like cars, jewelry, clothing, electronics, and anything else of value. Blue book value for vehicles and auction sites can help determine the value of these assets.
  • A complete list of any debts, including balances and whether you’re current on payments. In proving you will be unable to pay your tax debt, you also need to show your other debts, such as student loans, credit cards, personal loans, payday loans, medical debt, and anything else that you owe. You should also include whether you’ve been able to stay current on these obligations.
  • Any documentation that makes a case for being unable to pay off your balance. Did you lose your job? Did you find that what you used to do was automated and/or pays significantly less than it used to? If you are ill or disabled, you should have documentation from a medical professional that your ability to work is limited. Any other circumstances that caused financial devastation to the point you will be unable to pay off your tax debt, like a natural disaster, domestic violence, or eviction, should also be documented.

An Offer in Compromise is a very long process that requires staying up-to-date on your current tax payment plans and making a good faith effort to pay the balances. In having all of this information readily available, you can expedite the process and avoid resubmitting your offer.

Read for more information on IRS installment agreements.