The Ins and Outs of Form 656, Offer in Compromise

If you wanna make ’em an offer they can’t refuse, use Form 656 and all the right documents.

If you find yourself struggling to settle your tax liabilities, there might be a solution that can bring you some relief. Form 656, Offer in Compromise, provided by the Internal Revenue Service (IRS), is a potential option to consider. Essentially, it allows you to settle a tax debt for less than the full amount you owe. 

The purpose of Form 656 is to provide detailed information about the offer in compromise program and how it can help taxpayers who are unable to pay their tax liabilities in full. By filling out this form, individuals and businesses can propose a compromise with the IRS based on their current financial situation. The IRS will review the offer and determine whether it is acceptable or not.

Form 656 takes into account various factors, such as income, expenses, asset equity, and future earning potential, to determine the taxpayer’s ability to pay the outstanding tax liabilities. It is important for individuals to carefully complete the form and provide accurate information to increase the chances of the offer being accepted.

By utilizing Form 656, taxpayers have the opportunity to negotiate their tax debts and potentially reduce the amount owed. This can provide a much-needed financial relief for individuals and businesses alike, offering a fresh start towards resolving their tax obligations.

Rules of Thumb for Requesting an Offer in Compromise

If you are struggling to settle your tax liabilities and looking for a potential solution, consider requesting an Offer in Compromise (OIC) from the Internal Revenue Service (IRS). Requesting an OIC involves submitting IRS Form 656-B.

To get started, obtain the IRS OIC booklet. That contains Form 656-B, Form 433-A (OIC) for individuals, and Form 433-B (OIC) for businesses. These forms provide detailed information about your financial situation and help the IRS determine your ability to pay your tax debts in full.

When filling out Form 656-B, it is crucial to provide accurate information to increase the chances of your offer being accepted. The IRS takes into account factors such as income, expenses, asset equity, and future earning potential to evaluate your ability to pay.

Additionally, the OIC program offers different monthly payment options to suit your financial circumstances. It includes guidelines for low-income certification, ensuring that individuals with limited income can still benefit from this program.

Step-by-Step How to Complete Form 656

Filling out Form 656 is a crucial step in applying for the IRS Offer in Compromise program. This form, along with other required documents, provides detailed information about your financial situation and helps the IRS assess your ability to pay your tax debts. To increase your chances of success, it is essential to provide accurate and complete information on Form 656. This includes accurately reporting your income, expenses, assets, and future earning potential. The IRS takes all these factors into consideration when evaluating your ability to pay. It is important to note that the OIC program offers different payment options to accommodate your financial circumstances. This includes guidelines for low-income certification, ensuring that individuals with limited income can still benefit from this program.

Section 1: Individual Information

1. Full Name: Start by entering your full legal name. Make sure to write it exactly as it appears on your Social Security card or any official government-issued identification.
2. Social Security Number: Enter your Social Security number in the designated field. Check that you have entered the correct number to ensure accurate processing of your application.
3. Address: Provide your current residential address in full, including street address, city, state, and ZIP code. It’s important to use the address where you currently reside.
4. Mailing Address (if different): If you have a separate mailing address that differs from your residential address, enter it in this field. This is particularly useful if you want any correspondence or notifications related to your application to be sent to a different address.
5. Tax Periods: Indicate the specific tax periods for which you owe taxes. This typically includes the year or years in which the tax debts were incurred. Ensure that you accurately specify the relevant tax periods to prevent any confusion or delays.
6. Trust Fund Recovery Penalties: If you have any trust fund recovery penalties associated with a business, provide the associated business name along with the penalties. This allows the IRS to properly address any outstanding obligations related to the business.

Section 2: Business Information

If your business needs a compromise for tax debts with the IRS, this section is specifically designed for you. It’s important to note that businesses, such as corporations, partnerships, LLCs, or LLPs, do not qualify for the low-income waiver. However, this section will guide you through the necessary information you need to provide in order to proceed with your application.

To begin, you will need to provide your business name, address, and employer identification number. This ensures that the IRS can correctly identify your business and associate the tax debts with the appropriate entity.

Additionally, you will need to provide the primary contact information for your business. This includes the name, phone number, and email address of the person who will be the main point of contact throughout the application process. It’s crucial to include accurate and up-to-date contact information to ensure effective communication with the IRS.

Furthermore, you will be required to indicate the specific tax periods for which your business owes taxes. This typically includes the years in which the tax debts were incurred. By specifying the separate tax periods, the IRS can accurately assess your outstanding obligations.

Section 3: Reason for Offer

When applying for an Offer in Compromise (OIC), you will need to select one of two options for the reason behind your request. These options are Doubt as to Collectibility and Exceptional Circumstances.

1. Doubt as to Collectibility:

If you choose this option, you are stating that you do not have enough assets and income to pay your tax debt in full, and it would create financial hardship or be unrealistic for you to do so. This is the most common reason individuals and businesses choose when submitting an OIC.

2. Exceptional Circumstances:

If you believe that there are unique circumstances that make it unfair or inequitable for the IRS to demand payment from you, then you can select Exceptional Circumstances as the reason for your offer. However, it’s important to note that you must include a detailed written statement explaining these circumstances along with supporting documentation.

The written statement should clearly outline the exceptional circumstances that exist and provide any relevant information or documentation that supports your claim. This can include medical records, legal documents, or any other evidence that demonstrates the extenuating circumstances affecting your ability to pay.

By selecting the appropriate reason for your offer and providing the necessary written statement and supporting documentation, you increase your chances of a successful OIC application.

If you’re unsure which reason to choose or need assistance with your written statement, consult with a tax professional who can guide you through the process and ensure that your application is complete and compelling.

Section 4: Payment Terms

When it comes to the payment terms of an Offer in Compromise (OIC), you have two options to consider. These options are designed to provide flexibility and affordability for taxpayers seeking to settle their tax debts.

1. Lump Sum Cash Offer:

If you choose this payment method, you will be required to submit an initial payment of 20% of your total offer amount. This lump sum cash offer means an initial payment is due at the time of submitting your OIC. Once the initial payment is made, you will have a maximum of five additional payments or five months to pay off the remaining balance. This option is ideal for individuals or businesses who have access to a lump sum of cash and prefer to settle their tax debts quickly.

2. Periodic Payments Option:

Alternatively, you can choose the Periodic Payments option. With this method, you are required to include your first payment along with your offer. The remaining balance can be paid in monthly installments over a period of 6 to 24 months. This option is suitable for those who may not have a lump sum of cash available but can afford to make regular payments over a period of time.

When considering which payment method best suits your financial situation, it’s important to consult with a tax professional who can provide guidance tailored to your specific circumstances. They can assist you in determining the most suitable option and help ensure that your offer and payment terms are in compliance with IRS requirements.

Section 5: Designation of Payment, Electronic Federal Tax Payment System (EFTPS), and Deposit

To begin, it’s crucial to provide the payment amount, date, and EFT number for tracking purposes. This ensures that your payment is properly allocated towards your tax liabilities. By designating your payment, you can specify which tax debt or tax period you want the payment to be applied to.

When utilizing the EFTPS, you have the convenience of making secure electronic payments directly from your bank account. This system allows for quick and efficient processing of your payments, reducing the risk of errors or delays. It’s important to note that you must enroll in EFTPS before utilizing this option.

In the event that your offer is denied, you have the option of pre-designating how your payment allocation will be applied. This allows you to ensure that your payments are applied to specific tax debts or tax periods if your offer is not accepted.

Section 6: Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements

When submitting your offer, it’s important to disclose how you obtained the funds that you will use to make your initial payment and subsequent monthly payments. This can include savings, borrowing money, obtaining loans, or even selling assets. It’s essential to be transparent and provide accurate information about the source of your funds.

When it comes to making your payment, the IRS offers various acceptable payment methods. These include electronic funds transfer (EFT) through the Electronic Federal Tax Payment System (EFTPS), credit or debit card payments, check or money order, or even through the IRS2Go mobile app. However, it is important to note that cash payments are not acceptable. Choosing an acceptable payment method ensures that your payment is securely processed and properly allocated towards your tax liabilities.

In terms of filing requirements, it is essential to ensure that all tax returns, including individual and business tax returns, are filed and up to date. Failure to file your tax returns will result in the rejection of your offer. Additionally, it is crucial to adhere to all tax payment requirements, such as making estimated tax payments and federal tax deposits. Compliance with these requirements demonstrates your commitment to resolving your tax debts.

Section 7: Offer Terms

Section 7 of Form 656, Offer in Compromise, is where all the offer terms are laid out. This section outlines the specific terms and conditions of making an Offer in Compromise, including the rights and responsibilities of the taxpayer.

It is crucial to carefully review and understand the terms included in this section before submitting your offer. This will ensure that you are fully aware of what is expected of you as the taxpayer.

Some key points that are typically included in Section 7 are the consequences of failing to meet the requirements of an Offer in Compromise. These consequences may include the rejection of your offer and the reinstatement of your original tax liabilities. Additionally, it is important to note that making false statements or omissions can result in criminal charges.

What Else Is In the 656 Booklet?

In addition to completing Form 656, there are several additional forms included in the 656 Booklet that may need to be completed as part of the Offer in Compromise (OIC) process. These forms are important in providing a comprehensive picture of your financial situation and your ability to meet the terms of the proposed offer.

One of the key forms is Form 433-B, which is specifically designed for self-employed individuals and businesses. This form collects information on your income, expenses, assets, and liabilities related to your self-employment or business. It helps the Internal Revenue Service (IRS) determine the feasibility of your offer based on your ability to generate income and pay your tax debts.

Another form to pay attention to is Form 656-B, the compromise application booklet. This booklet provides step-by-step guidance on completing all the necessary forms and sections related to the OIC process. It includes detailed instructions on how to fill out the forms accurately and what official documents are required.

To determine your eligibility, follow the low-income certification guidelines and complete Form 656-L, which collects information on your family size and income to determine if you qualify for a reduced application fee.

Are You Eligible To File An Offer In Compromise?

The Internal Revenue Service (IRS) has certain eligibility requirements that need to be met in order for your OIC to be considered. While each case is unique, there are some common criteria that the IRS looks for. These include demonstrating that paying the full tax debts would cause significant economic hardship, showing that there is doubt as to the amount owed, and proving exceptional circumstances that justify the acceptance of an OIC.

To increase your chances of a successful OIC, it is highly recommended to seek professional tax help. The complexities of the OIC process can be overwhelming, and a tax professional can guide you through the necessary steps. Community Tax, for example, has experienced professionals who can assist in ensuring that your Form 656 accurately reflects your financial standing and provides the correct documents to support your case.

Remember, the IRS will typically accept an offer if a good enough reason is given and the correct documents are included. By working with professionals who understand the OIC process, you can have peace of mind knowing that you have the best chance possible to achieve a favorable outcome.

If you’re considering an Offer in Compromise, contact Community Tax today to discuss your eligibility and get the help you need to navigate this complex process.

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