“Can’t We Just Settle This?’ What The IRS Actually Looks At Before Saying Yes

I wait for this moment with every client I represent.

It sounds like this: “Can’t we just settle this?”

As if it's like negotiating with your local car salesman.

It's not.

The IRS can "settle" a debt under very specific circumstances. And there are exactly four of them.

Let’s break them down.

1. Effective Tax Administration (Equity or Public Policy): Not Happening

The IRS can compromise a liability based on Effective Tax Administration if doing otherwise would undermine confidence in the fairness of the tax system.

Yes, the tax is owed. Yes, the IRS could collect it. But collecting it would be "unfair."

This is the one clients gravitate toward because life seems unfair.

In practice, these cases are almost nonexistent. They tend to involve highly unusual facts and compelling circumstances that go far beyond “this feels unfair.”

2. Effective Tax Administration (Economic Hardship): Logical, But Limited

This is also a pie-in-the-sky reason for an offer to get accepted.

If collecting the tax would prevent the taxpayer from meeting basic living expenses, the IRS can consider a compromise.

On its face, that sounds promising.

But the IRS already has other tools to address hardship, specifically Currently Not Collectible status. Instead of reducing the liability, the IRS often chooses to pause collections and revisit the issue later.

Don't rely on this method.

3. Doubt as to Liability: Whether You Actually Owe the Tax

The question here isn’t whether the client can pay. It’s whether the tax is even correct.

Doubt as to liability exists when there is a legitimate dispute regarding the amount or existence of the tax.

You find this under certain circumstances including the following:

• Returns filed incorrectly or not filed at all, leading to IRS-generated assessments

• Innocent Spouse Relief

• Deductions disallowed due to missed notices

• Income reported inaccurately by third parties

• Payroll tax liabilities attributed to the wrong entity

• Trust Fund Recovery Penalties assessed against someone who may not be a responsible party

These aren't collections issues. These are disputes over the facts.

To raise doubt as to liability, certain threshold conditions have to be met, including

• No final court determination establishing the tax liability

• A legitimate dispute regarding the amount or validity of the tax (not tax protester arguments)

• Supporting documentation that substantiates the position

Often these issues will be resolved before an Offer in Compromise is even necessary. But when they’re not, the IRS gives you one last chance - submitting an offer based on doubt as to liability using Form 656-L.

4. Doubt as to Collectability: The One Everyone Means

When clients talk about “settling,” this is usually what they’re referring to.

Doubt as to collectability exists when the IRS determines it is unlikely to collect the full amount through enforced collection.

But this is where clients' expectations diverge from reality.

The premise isn't, “What can the taxpayer afford today?” It's, “What could the IRS collect using all available collection tools?”

That analysis includes:

• Liquid assets and equity

• Ongoing income

• Future earning potential

• Business cash flow (if applicable), and

• The Statute of Limitations

Based on these factors, the IRS comes up with an Offer number i.e. the taxpayer's Reasonable Collection Potential (RCP).

What Actually Moves an Offer Forward

Filling out the forms with the proper numbers is necessary, but the narrative surrounding the Offer in Compromise is just as important.

At its core, the IRS is evaluating one specific question:

“What happens if we try to collect this in full?”

If you can make the case that collecting the tax debt in full is going to create a serious hardship, whether it's circumstances, economics, or something else, and your numbers align, the IRS will accept an Offer. .

TL;DR

⏩ The IRS has four legal grounds to compromise tax debt

⏩ Two are rarely successful in practice (equity/public policy, economic hardship)

⏩ One focuses on whether the tax is correct (doubt as to liability)

⏩ One focuses on what the IRS can realistically collect (doubt as to collectability)

⏩ The difference between acceptance and rejection is often how the case is positioned

➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.

Contact Me Here: https://www.weisberg.tax/contact-1

Email: s.weisberg@weisberg.tax

Phone/Text: (248) 971-0885

Address: 300 Galleria Officentre, Suite 402, Southfield, MI 48034