Millions Face Tax Debt as IRS Manages $150 Billion in Back Taxes

The Internal Revenue Service is currently managing a massive portfolio of unpaid taxes, with the total amount owed by Americans exceeding $150 billion this year. This staggering figure highlights a widespread financial challenge for individuals and businesses across the country. With an estimated 20 million Americans projected to owe back taxes by 2026, understanding options for resolution is becoming increasingly critical for financial health.

For those struggling with this burden, the prospect of a full repayment can seem impossible. This is why many taxpayers are exploring a specific IRS program known as an Offer in Compromise. This program allows eligible individuals to settle their tax debt for less than the full amount they owe. It is a formal agreement between a taxpayer and the government that can provide a fresh start.

Who Qualifies for an IRS Offer in Compromise?

Qualifying for an Offer in Compromise is not a simple process, and the IRS is selective. The core principle is that the agency will accept a reduced payment only if it believes this amount is the most it can reasonably expect to collect within a reasonable time. The IRS refers to this as your Reasonable Collection Potential.

To determine this, the IRS conducts a thorough financial review. Agents carefully examine your current income, the value of your assets, and your necessary monthly living expenses. The goal is to calculate your true ability to pay after covering basic needs. It is important to note that the IRS uses its own standardized expense guidelines, which may differ from your actual costs.

A key requirement for applying is that all past tax returns must be filed. You cannot negotiate a debt for years where you have not filed a return. The application itself requires submitting Form 656, along with a detailed financial statement and a non-refundable application fee, unless you qualify for a low-income exemption.

How the IRS Calculates Your Reduced Payment

The calculation of your Reasonable Collection Potential is the most important part of the process. The IRS combines the value it can obtain from your assets with your projected future income. For assets, this means the IRS considers the quick-sale value of property like real estate, vehicles, or bank accounts, minus any loans against them.

For future income, the agency looks at your monthly income minus its allowed expenses for necessities like housing, transportation, food, and healthcare. Any remaining income is then multiplied by a set number of months—typically 12 or 24—to project what you could pay over time. The sum of your asset value and this future income figure becomes your offer amount.

This strict formula leads to a high rejection rate. Approximately 66% of Offer in Compromise applications are rejected, often because the IRS determines the applicant can fully pay the debt through an installment agreement or because the proposed offer is too low based on their calculations.

Special Considerations and Hardship Rules

For taxpayers in severe financial distress, special low-income hardship rules may apply. If you qualify under these rules, the IRS may temporarily delay collection efforts, such as wage garnishment or bank levies, while your financial situation is assessed. This can provide crucial breathing room.

An Offer in Compromise is a powerful tool but requires careful consideration. It is often advisable to consult with a tax professional who can help prepare a strong application and accurately assess your Reasonable Collection Potential. For the millions facing tax debt, understanding this program is a vital step toward resolving liabilities and achieving financial stability.