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Unlocking the Secrets of Form 656: Your Crucial Manual for IRS Offer in Compromise

Form 656 is the one tool that makes handling tax debt less stressful. The thought of negotiating with the IRS can seem impossible. There is a program called the Offer in Compromise (OIC). It lets some taxpayers settle their debt for less than they owe.

The catch? The IRS only accepts around 36% of OIC applications.

That low acceptance rate often deters people from even trying to file an OIC. The truth is, with good preparation and attention to detail, you can boost 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!

form 656 IRS Offer In Compromise

What is IRS Form 656?

Form 656 is the Offer in Compromise (OIC) form. It lets taxpayers settle their tax debt with the IRS for less than they owe. It’s an agreement between you and the IRS to resolve your tax debt through a reduced payment.

An Offer in Compromise helps eligible taxpayers settle their tax debt when they cannot 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:

You’ve filed all the required tax returns.

You’ve received a bill for at least one tax debt included in the offer.

You’re making all required estimated tax payments for the current year.

If you own a business with employees, you must make all required federal tax deposits. This includes deposits for the current quarter and the two quarters before it.

Submitting Form 656 IRS doesn’t guarantee acceptance by the IRS. It starts a process where the IRS checks your offer. They look at your income, expenses, and assets. They also consider any special situations that affect your ability to pay the full debt.

The IRS looks at your ability to pay when considering offers.

They consider your income, expenses, and asset value. If an acceptable offer is reached, you can settle your tax debt for less than the original amount owed.

What is IRS Form 656?

Form 656 is the official IRS form used to submit an Offer in Compromise. An OIC allows eligible taxpayers to settle their tax debts for less than the full amount they owe. It is typically used when paying the full tax liability would cause financial hardship or if there is doubt as to the tax liability.

Who is eligible to file Form 656?

Eligibility for an Offer in Compromise is based on several factors: Doubt about Collectibility: This happens when the taxpayer cannot pay the full amount owed within the 10-year collection period. Doubt as to Liability: When there’s a genuine dispute over whether the tax debt is accurate. Effective Tax Administration: Even if the taxpayer can pay in full, doing so may cause financial hardship. It could also be unfair or inequitable .

What are the basic requirements for submitting Form 656?

To submit Form 656, the following criteria must be met: You must have filed all required tax returns. You must have made any required estimated tax payments for the current year. If you own a business with employees, you need to make all required federal tax deposits for this quarter. You cannot be in an open bankruptcy proceeding.

How do you calculate your Offer in Compromise amount?

The IRS uses a formula to determine if your offer is acceptable. The formula considers: Your reasonable collection potential (RCP), which is the amount the IRS believes it can collect from your assets and future income. The offer amount should reflect the RCP unless there are special circumstances that warrant a lower offer.

What forms and documentation are required with Form 656?

In addition to Form 656, you'll need: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, which provide a detailed financial statement. Supporting documentation like pay stubs, bank statements, asset appraisals, and expense receipts to substantiate your financial information.

What fees are associated with submitting Form 656?

There is a non-refundable application fee of $205, unless you qualify for low-income certification (detailed in Form 656). Additionally, an initial payment must be included with the offer, unless you are submitting under the low-income guidelines.

What payment options are available when submitting Form 656?

There are two payment options: Lump Sum Cash Offer: This requires 20% of the offer amount as an initial payment when submitting Form 656. The remainder is paid in five or fewer installments. Periodic Payment Offer: You need to make the first payment when you submit the offer. The rest of the balance is paid in monthly installments while the offer is being considered.

Can an Offer in Compromise be rejected?

Yes, the IRS can reject an OIC if: The offer is too low based on the taxpayer’s reasonable collection potential. The taxpayer has not provided accurate financial information or failed to meet the eligibility criteria. The taxpayer is not compliant with current filing and payment obligations.

What happens if the IRS rejects the offer?

If the IRS rejects your offer, you can: To appeal the decision, you need to submit Form 13711. This form is called the Request for Appeal of Offer in Compromise. Make sure to do this within 30 days of the rejection. Resubmit a new offer, typically after reviewing and adjusting the offer amount based on the IRS’s feedback.

How long does it take to process Form 656?

The processing time for an OIC can vary but typically takes between six months to a year. During this time, collection activities may be suspended, but interest and penalties continue to accrue on the tax debt.

What happens after an Offer in Compromise is accepted?

Once the IRS accepts your OIC: You must remain in compliance by filing all required tax returns and paying all taxes on time for the next five years. Failure to remain compliant will result in the IRS revoking the offer, reinstating the original debt minus any payments made.