For those who cannot pay the full amount t✤hey owe in taxes, the Internal Revenue Service allows qualifying taxpayers to settle their tax debt for less than the full amo💝unt.

This is called an “offer in compromise,” and the IRS will typically approve a settlement offer if it “represents the most [they] can expect to collect within a reasonable period of time.” However, the IRS does not approve all applications. In 2024, the IRS approved 21% of its almost 33,600 offer in compromise applications.

Investopedia talked to Enrolled Agent Kesha Dawson Harris about the process of getting a compromise. Enrolled agents are federally🐻 licensed tax professionals who can represent taxpayers before the IRS. Th♏e interview has been edited for brevity and clarity.

INVESTOPEDIA: How does the IRS calculate the amount of tax debt a person can pay back?

KESHA DAWSON HARRIS: The offer in compromise calculator will generally give you an idea of the type of questions the IRS will ask.

It's a pretty intense process, and what a lot of people don't know is that you're really opening yourself up financially to the IRS. In order to qualify for an offer, they're going to ask about all your income, your household expenses, and any assets that you might have.

Most people think it's kind of like the television show, “Let's Make a Deal.” Like, ‘Oh, I owe the IRS $10,000, I'm going to offer them $100.’ It doesn't really work like that. It is literally a formula.

Another thing with the offer in compromise is that they use what's considered national standards. So you may be in an apartment and you're paying $1,600 a month. Well, the national standard for an apartment in your area may be $1,200. Then the IRS can say, 'We won't allow the other $400; the national standard for your area is only $1,200. '

Then it's up to someone like me to go in and defend that for you. Show a copy of the lease, and show them why you live in this area.

INVESTOPEDIA: How long does the process typically take, and do taxpayers have to begin repayment on their debt while they are in the compromise?

HARRIS: From the time everything is submitted until you get a response, I usually tell people it's going to take anywhere between eight to 10 months. Then, depending on whether it's not accepted, it might take a little longer, but the IRS has up to two years to respond.

Depending on what you offer, during this time, you could be making payments towards your offer. So let's say you offer $1,000 and you tell the IRS 'During this time frame, I'm going to pay $100 a month.' So you can be making payments on your offer, or you can wait until they accept it or deny it. But the collection process is on hold.

INVESTOPEDIA: What sorts of taxpayers would typically be qualified for a compromise?

HARRIS: I have a widow who did not work. She [used to file] jointly with her husband, and he left her with a lot of debt. She's not going to be able to pay the IRS $200,000 back. She's living on Social Security, and she does not have the ability to pay.

I have a client who is not able to work, but he has a house that is like $300,000, and so the IRS rejected the offer and said, 'Well, he has equity in his home.' He can go get a loan, but my defense is he can't work, so how's he going to pay the loan back?

It's average people who just kind of get into different situations. I'm going to say that my average client is about 35 to 40 years old. Maybe they've gone through some kind of financial situation, like we all did with COVID, or divorce, or they were laid off from a high-dollar job, and had a career change. Maybe they had a death, and now they're left with some marital debt from the IRS.

INVESTOPEDIA: What if a taxpayer doesn't get approved for a compromise?

HARRIS: We would go to appeals. The cool thing about appeals hearings [is] you're usually dealing with a person, and you can explain the situation a little bit better. You're able to have more types of conversations in appeals, and if it doesn't work out in appeals, usually they'll come up with... another program that you would probably qualify for, but sometimes it's better off than an offer in compromise.

An offer in compromise is not the only tool. So if someone doesn't qualify, there are other IRS options that can help a taxpayer.