How to Get the Interest & Penalties Removed From IRS Debt

Uncle Sam may waive interest and penalty payments after an Offer In Compromise.

When you fall behind on your tax payments, interest and penalties can add up quickly and place a heavy burden on your finances. If you cannot pay them, the Internal Revenue Service may put a lien on your property, attach your wages and even take money from your bank accounts. Fortunately, you may not have to let the situation get that bad. You can take certain steps, like making a settlement offer that may remove penalties and interest from your debt. While there is no guarantee that your settlement offer will be accepted, you have a good chance if the offer is fair, and you won't have to worry about additional penalties.

Things You'll Need

• IRS Form 656
• IRS Form 433-A
• Supporting documentation as required by the forms
• Application fee

Instructions

1. Determine whether an Offer In Compromise (OIC) would fit into your current financial situation. According to the law offices of Roni Deutch, the OIC program gives taxpayers a chance to settle their debt to the IRS for a smaller amount than what is owed. If you can afford the initial amount, but not the penalties and interest, this may allow you to remove them.

2. If you would be able to pay an Offer In Compromise that eliminates interest and penalties, fill out an IRS Form 656, which is the OIC application, and Form 433-A, which details your financial information and the terms by which you will pay the OIC. A Form 433-A worksheet is available to help you fill out this form. You will be required to include additional documentation as spelled out by these forms. Subtract the amount of penalties and interest from your offer amount.

3. Before you submit the forms to the IRS, review your situation one last time to make sure that you will be able to make the proposed payments. You must also be prepared to file your tax returns on time for the next five years and to pay any owed taxes on time during that period. According to the IRS, you must meet those conditions to maintain your OIC.

4. Send your completed application and supporting documents to the correct IRS office, along with the appropriate application fee. You can find the address and fee information on the IRS website (see Resources). It's very important to include complete documentation because the IRS will consider your financial situation when it makes its decision on whether to accept your proposal amount.

5. Be prepared to wait a year or longer to find out whether your OIC is accepted. It may take as long as 18 months for the IRS to process your request and an additional one to three months to finalize the offer and complete the necessary paperwork. During this process, continue to file your new tax returns on time and pay any current taxes.

6. If your offer is accepted, make sure to make all of your payments on time, file your tax returns on time for the next five years and pay all of your new taxes promptly. If you do not fulfill the terms of the agreement, your OIC can be withdrawn. This means you will have to pay the interest and penalties even if they were removed in the agreement.

Tips & Warnings

• If you will not be able to file a tax return by April 15 during the five-year period following acceptance of your OIC, you may file for an automatic extension, Filing on-time returns is a requirement to maintain an OIC. However, the IRS will not revoke the agreement if you file for an extension, as long as you file your tax return by the end of the extension date.

• The OIC process can be complicated, so it may be better to consult an attorney who can file the paperwork for you. Otherwise, if you fill out the paperwork incorrectly, the IRS may reject your offer and you'll lose the opportunity to avoid paying penalties and interest.

Resources

• IRS information on Offers in Compromise
• Information on ways to settle tax debt