Form 656, also known as an offer in compromise, is a proposed contract with the Internal Revenue Service (IRS) to settle a tax liability for less than you owe.
Important Points to Remember
- Because the IRS rejects the majority of offers in compromise, it's a good idea to work with a tax professional to give yourself the best chance possible. Form 656 is used to present an "offer in compromise" (OIC) with the IRS to settle a tax liability for less than you owe.
- The IRS will only accept your offer if it is evident that it would not receive more money from you otherwise.
- You must pay the required fee and proposed installments, and you must be current on all tax filings and other tax payments. You must not be in bankruptcy proceedings.
- best chance of getting your offer accepted.
What is the purpose of Form 656
If you get behind on your tax payments, your debt load can soon grow. Penalties and interest accrue for late tax payments, making it even more difficult to repay the bill. Form 656 allows you to work out a deal with the IRS to pay less than the amount outstanding. The IRS receives an outline of your financial status on Form 656, the "offer in compromise" (OIC), so it can examine your debt and ability to pay. It will assess whether the offer is in the best interests of both parties.- IRS Form 656: Compromise Offer
- Who Fills Out Form 656?
- An OIC can be requested for one of three reasons:
- The collectability of your tax debt is in question.
- There's a question concerning your financial responsibility for the debt.
- Because of a unique condition, it's "effective tax administration."
- You'll have to back up your claims.
- Collectability Suspicions
Liability Suspicions
Doubt as to liability suggests you don't believe you're liable for the tax debt's remaining sum. You must include a statement stating why you believe this is the case. For this reason, finding a means to resolve the underlying tax debt may be quicker, faster, and less expensive than seeking an OIC. Filing an amended tax return to address any apparent errors, requesting innocent spouse or wounded spouse relief, requesting penalty abatement, or requesting an audit reconsideration are some of the options available.Tax Administration That Works
You're saying that paying the tax in this case would put you in considerable financial hardship. Collecting the entire debt from you would be unjust and inequitable. You have no doubt that you are accountable for the outstanding tax bill and that if the IRS tried, it would most likely be able to collect the full amount owing. Serious health problems are examples of severe economic stress. Enrolled agent David Bauman, a JK Harris offer-in-compromise specialist, suggests: "The taxpayer must supply a thorough narrative of the unusual and extraordinary circumstances, together with the rest of the offer-in-compromise documentation, when filing an offer based on effective tax administration." A life-or-death emergency, such as a significant medical condition, would be considered "extraordinary circumstances." Requesting a long-term installment plan, a partial-pay installment agreement, or a penalty abatement based on reasonable cause are all options. The IRS rarely accepts a proposal based on good tax administration.Where Can I Obtain Form 656
You can fill out the entire Form 656 booklet yourself by downloading it from the IRS website. However, completing this and any other relevant paperwork is normally best done with the help of a tax specialist. It's not easy to get your OIC just right, so getting some assistance can increase your chances of success.Filling Out and Reading Form 656
The Form 656 booklet offers step-by-step instructions as well as any other forms you may need to submit with your OIC. You should have a thorough understanding of your personal and corporate finances, including employment, wages, assets, and liabilities. Make sure you have all of these facts on hand, as well as an explanation for why you're making the offer.Payment Conditions
You must also specify the terms of your offer's payment. These calculations begin when the IRS accepts and approves your OIC. One of two alternatives is available to you: Lump-sum payment: This entails paying 20% of your total offer up front, as well as a proposed payment schedule over the next one to five months. You propose paying off your given amount over a six-to-twenty-four-month term. Unless you meet the low-income certification standards, you should plan on paying your recommended monthly amounts until you hear whether the IRS has accepted or rejected your offer. If you haven't submitted all of your required tax returns or kept up with your estimated payment requirements, the IRS will reject your OIC. You can't be in the middle of a bankruptcy case.Is it possible to file Form 656 electronically
Form 656 cannot be e-filed. You must send your offer in compromise, along with all applicable papers, to the proper IRS office. You can, however, set up your payments to be made electronically.Where Should Form 656 Be Sent
If you live in Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, or Washington, mail your completed Form 656 to the following address: The COIC Unit of the IRS Center in Memphis- AMC, P.O. Box 30803,
- Memphis, Tennessee
- The COIC Unit of the Brookhaven IRS Center
- Box 9007, P.O. Box 9007
- Holtsville, New York 11742-9007
