There are several different forms of tax relief available from the the Internal Revenue Service. Some of them absolve you of interest and penalties, and some merely suspend collection activities for a set period while interest and penalties continue to accumulate. The only form of tax relief that allows you to settle with the IRS for less than the amount of your past due taxes is called an "offer in compromise."
Determine if the amount of back taxes due as calculated by the IRS is accurate. The IRS may have made an error in interpreting tax law, or it may have ignored evidence that you submitted to prove that your actual tax debt is less than what the IRS says it is. If you have evidence of an IRS error with regard to either tax law or the facts of your particular case, you can use it as a basis for filing for an offer in compromise.
Collect all of your financial records to determine your yearly income, projected future income and total assets. Use this data to make to the IRS a case that your financial situation is so fragile that you will probably never be able to pay the full amount of your back taxes even if the IRS auctions your property. Pay particular attention to the extent to which you require business property in order to generate enough income to pay even a portion of your taxes. If you can establish that IRS collection action will not result in the collection of the full amount due, you can use this as a basis for filing for an offer in compromise.
Look for circumstances that would cause you extraordinary hardship if the IRS used aggressive means to collect the full amount of your back taxes. An example would be the obligation to support an aging parent who would not be able to receive adequate medical treatment if the IRS auctioned your property. This "hardship" test is the most difficult way to file an offer in compromise because it is rarely granted.
Complete IRS Form 656. You may use any one of the above three grounds for seeking an offer in compromise or all three. You must make an offer of partial payment, disclose personal information and explain the basis of your offer.
Complete IRS Form 433-A if you are an individual or IRS Form 433-B if you are an independent legal entity. These forms require you to disclose detailed information about your finances. If you are asserting that the IRS erred when calculating your tax liability, you do not have to file either of these forms.
Submit both of the above forms to the appropriate IRS Service Center (listed in the instructions to Form 656), and include evidence to establish the basis of your offer. You will have to pay a filing fee of $150 unless you are disputing the amount of your tax liability or you meet the standards for the low-income fee waiver.
Appeal any denial of your offer with the IRS Office of Appeals within 30 days of the date printed on the IRS refusal letter.