Form 656 (Offer in Compromise)

Dealing with tax debt is incredibly stressful, and the idea of trying to negotiate with the IRS can feel downright impossible. However, there is a program called the Offer in Compromise (OIC) that allows some taxpayers to settle their debt for less than the full amount owed.

The catch? Only around 36% of OIC applications are accepted by the IRS.

That low acceptance rate often deters people from even trying to file an OIC. But the truth is, with the right preparation and attention to detail, you can significantly increase your chances of getting approved.

In this guide, we’ll walk you through everything you need to know about the Offer in Compromise process and Form 656 – the official application. From understanding eligibility requirements to calculating an appropriate offer amount, we’ll straightforwardly cover it all.

Don’t let that 36% statistic scare you away from potential tax relief. With Keith Jones CPA the Offer in Compromise could be the solution that finally puts your tax debt behind you. Let’s dive in!

What is Form 656?

Form 656 is the Offer in Compromise (OIC) form that allows taxpayers to settle their tax debt with the Internal Revenue Service (IRS) for less than the full amount owed. It’s an agreement between you and the IRS to resolve your tax debt through a reduced payment.

An Offer in Compromise provides eligible taxpayers with an opportunity to get out of tax debt when they can’t afford to pay the full amount. The goal is to reach a compromise that is fair for both you and the IRS, based on your ability to pay.

To submit an OIC using Form 656, you generally must meet certain requirements:

  1. You’ve filed all the required tax returns.
  2. You’ve received a bill for at least one tax debt included in the offer.
  3. You’re making all required estimated tax payments for the current year.
  4. If you’re a business owner with employees, you’re making all required federal tax deposits for the current and two preceding quarters.

Submitting Form 656 IRS doesn’t guarantee acceptance by the IRS. It initiates a process where the IRS evaluates your offer by verifying your income, expenses, assets, and any special circumstances affecting your ability to pay the full debt.

The IRS considers offers based on your realistic ability to pay, taking into account your income, expenses, and asset equity. If an acceptable offer is reached, you can settle your tax debt for less than the original amount owed.

How to Fill Out Form 656?

Now that we know the concept and eligibility to fill out Form 656, here are the instructions for each section of Form 656.

Section 1: Individual Information

This section requires you to provide your personal details, such as your full name, social security number, mailing address, and employer identification number (EIN) if you are a sole proprietor with an EIN. You also need to specify the tax years for which you are submitting the Offer in Compromise by checking the appropriate boxes (e.g., 2023, 2024 .). Additionally, there is a low-income certification section where you can check a box if your family income is below a certain level, which may exempt you from paying the application fee.

Section 2: Business Information

If you are submitting an Offer in Compromise for business taxes, you need to complete this section. It requires you to provide your business name and address, your EIN, the name and title of the primary contact person, and their telephone number. You also need to mark the correct box for the specific type of business tax you are addressing in your offer, such as corporate income tax or payroll taxes, and specify the relevant tax years.

Section 3: Reason for Offer

In this section, you must indicate the reason for your Offer in Compromise. The most common reason is “Doubt as to Collectibility,” which means you do not have the financial means to pay the full amount you owe. You need to check the appropriate box and provide a written explanation of your circumstances, detailing why the amount you are offering is the most you can afford to pay and why it is in the IRS’s best interest to accept your offer.

Section 4: Payment Terms

There are two options for paying your Offer in Compromise (OIC):

  1. Lump Sum Cash Offer – You pay 20% of the total offer amount upfront when submitting the offer. You don’t have to pay anything further until the offer is accepted. Once accepted, you have 5 months to pay the remaining balance in full.
  2. Periodic Payment Offer – You make equal monthly installment payments while your offer is being reviewed and, after acceptance, over 24 months.

Section 5: Designation of Payment and Deposit

In this section, you can specify which tax debt you want your payment to be applied to. This is helpful if your offer gets rejected – then your payments can be credited towards a specific tax period or year. The IRS will also issue refunds for any amount paid towards a rejected offer.

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

  • Explain where you got the money to pay your offer, like borrowing from family/friends or taking a loan from a retirement account.
  • Check the appropriate box under Filing Requirements to confirm your tax return filing status.
  • Check all applicable boxes under Tax Payment Requirements to certify you’ve made the required tax payments.

Section 7: Offering Terms

Is a crucial part of Form 656 as it outlines the terms and conditions you must agree to when submitting an Offer in Compromise (OIC). It covers the IRS’s right to keep any payments made, the requirement to comply with tax laws during and after the offer period, and the consequences of defaulting on the accepted offer terms.

Section 8: Signatures

In this section, the taxpayer must sign and date the application, affirming under penalty of perjury that the information provided in Form 656 offer in compromise and any accompanying documentation is true, correct, and complete to the best of your knowledge.

Your signature in Section 8 legally binds you to the terms and conditions outlined in Section 7 and confirms your commitment to fulfilling the requirements of the IRS offer in compromise form 656 if accepted by the IRS.

Section 9: For Paid Preparers Only

If you hired a professional tax preparer or representative to assist you in completing the IRS 656 form and the accompanying documentation, Section 9 is where they must provide their information and signature.

In this section, the paid preparer must include their name, firm’s name (if applicable), address, and Preparer Tax Identification Number (PTIN). They must also sign and date the form, affirming that they have prepared the Offer in Compromise application based on all relevant information provided by you, the taxpayer.

By signing Section 9, the paid preparer acknowledges their responsibility for the accuracy and completeness of the information they have entered on Form 656 and any accompanying forms or documents.

Other Forms in the 656 booklet

The Offer in Compromise Booklet includes several supplementary forms that provide detailed financial information to support the taxpayer’s offer amount. Let’s explore IRS Forms 656 in detail:

Form 433-A (OIC): Collection Information Statement for Individuals

Form 433-A is a crucial component for individual taxpayers who are wage earners or self-employed. It requires comprehensive information about:

  • Monthly income sources (wages, self-employment, rental, etc.),
  • Living expenses (housing, utilities, transportation, healthcare),
  • Assets (bank accounts, investments, real estate, vehicles), and
  • Liabilities (mortgages, loans, credit cards).

By providing this detailed financial picture, the IRS can accurately assess the taxpayer’s ability to pay and determine an appropriate offer amount.

Form 433-B (OIC): Collection Information Statement for Businesses

If the taxpayer is a business entity (corporation, partnership, LLC), Form 433-B is required. It gathers comprehensive financial information about the business’s income, expenses, assets, liabilities, and operational details. This includes gross receipts, cost of goods sold, operating expenses, bank accounts, accounts receivable, inventory, equipment, loans, and accounts payable. The form also covers ownership structure, number of employees, and potential for increased income or profitability. This information helps the IRS evaluate the business’s ability to pay and determine an appropriate offer amount.

Form 656-L: Doubt as to Liability Offer in Compromise

In cases where the taxpayer disputes the existence or amount of the tax debt itself, they must use Form 656-L. This form requires a detailed explanation of why the taxpayer believes the tax debt is incorrect or invalid, supported by legal arguments, evidence of errors in the assessment, or other relevant information and documentation. By submitting Form 656-L, the taxpayer requests that the IRS consider their legal position before deciding on the Offer in Compromise.

Form 656-PPV: Periodic Payment Voucher

If the taxpayer chooses to make periodic payments for their Offer in Compromise, Form 656-PPV accompanies each payment installment. This form ensures that the payments are correctly applied to the taxpayer’s account and credited toward the accepted offer. It includes the taxpayer’s identification information, the tax period, and the payment amount.

Insider Secret About the IRS Form 656

A unique strategy for expediting your Offer in Compromise (OIC) submitted through IRS Form 656 involves undisclosed assets. Consider assets inherited with a low tax basis, meaning minimal capital gains tax upon sale. Offering the potential sale proceeds from such assets on Form 656 demonstrates your commitment to resolving the debt and can incentivize the IRS for a quicker settlement.

Remember, seeking professional help in such cases is always a good idea to get the best help, this increases your chances of a favorable outcome and ensures you explore all available options

Frequently Asked Question

How much should I offer in an Offer in Compromise? Expand

Keith Jones will help you calculate an offer based on your assets, future income, and essential expenses to ensure it reflects your financial capacity accurately for a successful compromise.

What are alternatives to an Offer in Compromise? Expand

Alternatives include installment agreements, currently not collectible status, bankruptcy, IRS audit representation, wage garnishment legal services, and services like Optima Tax Relief for comprehensive tax issues.

Can I submit Form 656 electronically? Expand

Form 656 must be mailed, but the Keith Jones Tax Relief program can guide you in the process and help you use the Electronic Federal Tax Payment System (EFTPS) for electronic payments of fees and offers.

How do back taxes and an Offer in Compromise relate? Expand

Back taxes are unpaid tax debts From previous years that qualify for an OIC If you can’t pay in full. An OIC allows you to settle Substantial back tax liabilities For a reduced amount you can afford. Keith Jones can give you back taxes help by negotiating an acceptable offer Based on your financial situation, an OIC resolves your back taxes.

How long does the IRS take to review my offer? Expand

It generally takes the IRS 4 to 12 months to review an Offer in Compromise. Keith Jones will monitor your case and keep you updated on the progress.

What if the IRS rejects my offer? Expand

If rejected, Keith Jones can help you appeal using IRS Form 13711 within 30 days, gathering the necessary documents to strengthen your case.

Can I use Form 656 for state taxes? Expand

Form 656 is for federal taxes only, but Keith Jones can help determine if your state has similar programs and guide you through the application process.

What is the purpose of IRS Form 656? Expand

Form 656 is used for the Offer in Compromise program, helping taxpayers settle tax debts for less than they owe due to financial hardship. Keith Jones Tax Relief specializes in navigating this process effectively.

Are you experiencing IRS wage garnishment and seeking legal representation for Offer in Compromise (OIC) negotiations? Expand

Our in-house skilled IRS wage garnishment attorneys specialize in OIC, offering expert assistance to halt garnishment and resolve tax debt efficiently. Reach out for a swift resolution and regain financial control.

What happens if my offer is accepted? Expand

If accepted, you must comply with all IRS terms, including staying current with future taxes. Keith Jones will help ensure you understand and meet these requirements.

Get Help With Form 656 Expand

Keith Jones Tax Relief offers thorough support in managing the Offer in Compromise process, from completing Form 656 to strategizing your offer based on a detailed financial analysis. Contact them for expert assistance.

Keith L. Jones, CPA - TheCPATaxProblemSolver offers specialized Tax Resolution Services designed to assist businesses and individuals in overcoming complex tax challenges. With extensive experience in tax problem resolution, Keith L. Jones provides personalized strategies and solutions to alleviate tax burdens. Services include personalized tax consultation, tax debt relief strategies, expert audit representation, penalty abatement assistance, innocent spouse relief support, tax lien and levy resolution, offer in compromise guidance, and proactive tax planning and compliance. By choosing Keith L. Jones, CPA - TheCPATaxProblemSolver, clients receive dedicated support, reliable guidance, and expert representation to achieve financial peace of mind. Contact Keith L. Jones today to schedule a consultation and take the first step towards effective tax issue resolution.