If I pay the tax, will the IRS forgive interest and penalties?
A common question from a reader about the IRS settling for tax and forgiving the interest and penalties:
I owe the IRS $35,000 – I would like to pay what I owe, but the interest and penalties just seem awfully high. I want to offer to pay the IRS what I originally owed – will they accept that and forgive the interest and penalties?
In negotiating with the IRS, it is important to remember that the government is not a private enterprise, and common sense judgments often yield to tax laws and internal IRS guidelines about how a tax debt can be settled. That means what might seem like a good deal to you is not a good deal to the IRS. Negotiating with the IRS requires understanding their guidelines – it may seem unfair, but that is the reality.
And the IRS guidelines have no provision for a deal where they can simply accept the tax and forgive interest and penalties just because it seems like a good deal.
Let’s break that down.
First, the IRS authority to settle a debt is done through an offer in compromise. In an offer in compromise, the IRS investigates how much can be collected from you over the time they have to do it (which is 10 years, known as the statute of limitations on collection). In an offer, the IRS values your assets, your income, and your living expenses – arriving at how much you are worth, and how much you could pay back to them monthly. If you owe $35,000 but you are worth $10,000, then $10,000 is the value of the compromise. If you are worth $50,000, then there is no compromise as the IRS believes it can collect the full amount.
In an offer in compromise, you could settle for less than the amount of tax. Or it could be more. There is generally no factoring of tax vs. interest vs. penalty in the compromise settlement equation. The settlement is based on collection potential.
Although it seems reasonable, the IRS does not approach settlement by saying “Let’s just take the tax and be done with it – that makes sense over waiting years to get paid.” An offer in compromise is not designed for the IRS to consider the question of whether they should just accept the tax and be done with it because it makes sense.
Bottom line: There must be a factual basis for interest and penalty to be forgiven by the IRS. It is not done as a collection decision.