Ask the Tax Editor, April 24: How Can I Resolve My IRS Tax Debt?

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions relating to how individuals can resolve their IRS tax debt. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. IRS alternatives for resolving tax debt

Question: When I filed my 2025 federal tax return this month, I unexpectedly owed taxes. But I don't have the money to pay the bill. What can I do to resolve my IRS tax debt?

Joy Taylor: Try not to worry too much because you are not alone. Millions of individuals owe tax debt to the IRS. The agency has a number of alternatives to help individuals resolve their tax debt.

If you have a financial hardship, you can contact the IRS to request a temporary collection delay until your financial condition improves. Also, look into submitting an offer in compromise to settle your tax debt at less than what you owe or applying for an IRS online payment plan.

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The IRS has a new online tool for individuals and businesses with federal tax debt. The tool provides them a simple way to explore payment options for unpaid taxes and to identify next steps based on their circumstances. If you decide to use the tool, you will need to answer a series of questions about your financial situation and your tax debt, and the tool will guide you to potential payment alternatives.

2. Should I submit an offer in compromise?

Question: I owe tax debt to the IRS. A friend told me I should submit an offer in compromise to the IRS, and it will automatically reduce the taxes that I owe. Is it really that easy?

Joy Taylor: Unfortunately, no. Your friend is correct that the IRS accepts offers in compromise (OIC) to settle tax debt at less than what the taxpayer owes. But the process isn't automatic. The key factor that the IRS takes into account when reviewing an OIC application is the taxpayer's ability or inability to pay the balance in full, and whether full payment would result in financial hardship. That's why you must disclose your income and your assets to the IRS in your OIC application.

If you're thinking of submitting an OIC to the IRS, you will want to review the IRS's Offer in Compromise Form 656 Booklet for the rules and the forms. There are two payment options you can choose from when submitting your OIC. The lump sum cash option requires you to pay 20% of the total offer amount up front, with the remaining balance to be paid in five or fewer installments within five months of the date your offer is accepted. There is also the periodic payment option, which requires that you make your first payment with the offer, with the remainder remitted monthly over a period of six to 24 months.

Here are some more tips if you're thinking about making an OIC:

• Be sure you have filed all required federal tax returns. Otherwise, the IRS will return your application and the filing fee, and apply any initial payment included with your submission to your tax debt.
• Continue to timely file your tax returns and pay taxes even after the IRS accepts your OIC.
• Individuals or businesses in bankruptcy cannot apply for an OIC.
• There is a $205 application fee. Low-income individuals are exempt from paying this.
• The IRS has an online tool for individuals to check preliminary eligibility for filing an OIC with the IRS.

3. Avoid offer-in-compromise "mills"

Question: I owe tax debt and I'm thinking of submitting an offer in compromise. Can I prepare the OIC application myself or should I use a tax professional?

Joy Taylor: It is up to you whether you want to try preparing the OIC application yourself and submitting it to the IRS or use a tax professional. It depends on your knowledge of taxes and finances. Note that a reputable tax professional who is familiar with submitting OICs and dealing with IRS collection employees can help guide you through the process, which may make it less stressful for you. You can also ask for IRS assistance with the process.

Whatever you do, avoid offer-in-compromise "mills," the IRS's term for companies and promoters that hawk tax-debt relief plans with promises to settle your debts at steep discounts. I'm sure you've seen the commercials on TV or heard ads on the radio from firms promising to settle your tax debt for pennies on the dollar. These companies charge big up-front fees and churn out applications for offers in compromise that most of their clients cannot qualify for, the IRS says.

4. The IRS used my refund to offset taxes I owed

Question: I owe tax debt to the IRS from prior years. I filed my 2025 tax return this year, and the IRS took my refund and applied it against my prior-year taxes. Is this legal?

Joy Taylor: Yes. If you owe back income taxes, the IRS can grab your current-year refund and apply it against the amount you owe. The same can happen if you owe nontax debts to a federal agency, state income taxes, certain unemployment compensation debts owed to a state or past-due child support. The IRS can take your current-year federal income tax refund and apply it against any of these past-due obligations.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

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