Generally, the IRS will only settle for what it deems feasible to pay. To determine this, you will take into account your assets (house, car, etc.). The IRS has the authority to cancel all or part of your tax debt and settle with you for less than you owe. This is called a compromise offer or OCI.
Now, that doesn't mean you can reach an agreement with the IRS for that amount or that there's a 40% chance that your offer will be accepted. The IRS uses a very specific formula to determine the liquidation value of an OCI and whether to accept or reject it. Your success depends on how you fit into the IRS formula. The IRS will sometimes consider an agreement that allows you to pay a reduced amount of what you owe in back taxes, which is called a transaction offer.
You must convince the IRS that you cannot pay what you owe and offer to pay the reduced amount in a lump sum or in short-term installments. While an OIC may not be appropriate for all taxpayers who have back taxes, the IRS recently expanded its commitment to offering forgiveness programs under its Fresh Start Initiative to include more flexible terms, allowing more taxpayers to qualify now than in the past.
