Definition and Meaning of IRS Form 656
IRS Form 656, known as the Offer in Compromise (OIC), is a legal document used by individuals and businesses to request a settlement with the IRS for less than the total amount owed. This form allows taxpayers who qualify to resolve their tax debts, providing a pathway to financial relief when they are unable to pay their tax liability in full. The IRS considers offers based on a taxpayer's ability to pay, income, expenses, and asset equity. It serves as a critical tool for those seeking to alleviate their financial burdens regarding unpaid taxes.
To qualify for an Offer in Compromise, taxpayers must demonstrate that paying the full amount owed would cause significant financial hardship. The process involves detailed financial disclosures to the IRS, allowing them to assess the taxpayer's situation comprehensively. Common scenarios necessitating the use of Form 656 include severe medical conditions, job loss, or other circumstances that severely impact income and ability to pay.
Steps to Complete the IRS Form 656
Completing IRS Form 656 requires careful attention to detail to ensure accuracy and compliance with IRS guidelines. The steps below outline the essential processes involved:
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Gather Financial Information: Collect documentation of income, expenses, assets, and liabilities. This may include bank statements, pay stubs, tax returns, and information on debts.
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Complete the Form: Fill out the form accurately, including personal information, tax identification number, and the specific amount of tax debt being compromised.
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Choose a Payment Option: In this section, select how you plan to pay any initial amount due—either lump sum or periodic payments. Each option has distinct implications for time and qualification.
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Include Required Attachments: Enclose necessary documentation, such as Form 433-A for individuals or Form 433-B for businesses, to support the claims made on Form 656.
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Review for Accuracy: Carefully check the form for any errors. Mistakes can lead to delays or rejections of your offer.
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Submit the Form: Send your completed Form 656 to the appropriate IRS address, along with a non-refundable application fee and any initial payment if applicable.
Important Terms Related to IRS Form 656
Understanding the terminology associated with IRS Form 656 is crucial for navigating the application process successfully. Key terms include:
- Offer in Compromise (OIC): A proposal from the taxpayer to the IRS to settle tax debts for less than the full amount owed.
- Doubt as to Collectibility: A basis for an OIC where the taxpayer doubted the IRS’s ability to collect the full tax amount.
- Non-Refundable Application Fee: A fee submitted with the application that is retained by the IRS regardless of whether the offer is accepted or rejected.
- Financial Disclosure: The detailed information concerning income, assets, and liabilities that the IRS requires to assess eligibility.
Eligibility Criteria for IRS Form 656
To file Form 656, taxpayers must meet specific eligibility requirements established by the IRS:
- Tax Compliance: All tax returns must be filed, and any estimated taxes owed must be paid.
- Ability to Pay: An assessment of the taxpayer's financial situation indicates that paying the full amount would create financial hardship.
- Not Under Bankruptcy: Taxpayers in Chapter 7 bankruptcy are ineligible until the bankruptcy case is resolved.
- No Current Levies: The IRS cannot have enforced collections against the taxpayer when an OIC is submitted.
IRS Guidelines for Offer in Compromise
The IRS has established specific guidelines to ensure a fair evaluation process for Offers in Compromise. These guidelines include:
- Evaluation of Financial Situation: The IRS reviews the submitted financial data to determine the taxpayer's ability to pay, including sources of income and allowable living expenses.
- Consideration Timeline: The IRS typically takes from six months to one year to process an OIC, during which time the taxpayer must not have enforced collection actions against them.
- Use of IRS Form 433: Taxpayers must provide a detailed financial disclosure using either Form 433-A or Form 433-B, which captures all aspects of their financial situations.
By following IRS guidelines and completing Form 656 correctly, taxpayers can negotiate their tax debts more effectively, positioning themselves for potential financial relief.
