The short answer to this question is yes, but…The IRS does have a program for you to settle your back taxes for a reduced amount. This request is called an Offer In Compromise, and it is submitted to the IRS using Form 656.
Unfortunately, there are a lot of firms out there that would have you believe that this is a simple and expedient process, and they will do it all for you for a nice five-digit fee. They have all kinds of neat little names for this program, most of which are not even used by the IRS, like IRS Second-Chance Program or the Government’s Tax Forgiveness Program. Proof positive that you cannot believe everything you read (or hear).
Here are a few facts about this program, which can be fact-checked on irs.gov, in the Internal Revenue Manual, which is also online, or in IRS Publication 656-B (Form 656 Booklet).
In order for you to compromise your tax liability for a lesser amount, you must go through an arduous process to prove to the IRS that you do not have the means to pay the full amount of your liability. And you are going to have to prove it with receipts and other paperwork. In addition, you must convince the IRS that letting you off the hook for the total amount is in the “government’s best interest”, not yours. In other words: Is the amount that you are offering them more than they could otherwise expect to collect from you for these taxes?
For example, they look at your age. How many more earning years do you have ahead of you? Are you adequately educated to get a job where you can earn enough money in subsequent years to pay this off, even though you cannot pay it right now (They have 10 years to collect). Are you disabled? Are you a senior citizen with a fixed income? Do you have assets (including your home) that you could liquidate to pay off all of your debt?
So, you see, the IRS looks at the entire scope of collectability of the taxes that you owe, now and in the foreseeable future. Form 656 is used to request an Offer In Compromise. After you submit your Form 656 and your supporting documents to the IRS, they will review and verify them to make sure that they are correct, because if you try to fool them about anything, your Offer is denied. You also have to remain compliant with all federal filing and paying of your taxes for five years after the acceptance of the Offer.
I have applied for Offers In Compromise for numerous clients, and will say that as tough as it may be to get one approved, it has never been easier, because over the years, the IRS has softened up on these a little, and more of them are getting approved than ever before. You just have to be realistic about whether or not you will qualify. If you submit your own Offer, most taxpayers have to pay a $205 fee to be submitted with Form 656. But it might be worth the expense of having someone represent you that has handled many of them.
Hopefully, this cleared up some of the misleading information that is out there about Offers In Compromise. Good Luck.