Definition & Meaning
IRS Form 656, known as Offer in Compromise, is a document used by taxpayers seeking to settle their tax liabilities with the Internal Revenue Service for less than the full amount owed. The 2017 version of Form 656 is specifically aligned with the guidelines and tax regulations applicable to that year. It is an essential tool for taxpayers who are financially unable to pay their full tax debt. The form outlines the taxpayer's proposal to the IRS to pay a reduced amount, presenting reasons and financial evidence to support their offer.
Taxpayers submit this form in situations where paying the full tax debt would create a financial hardship, or when doubt exists regarding the amount owed. It requires detailed financial documentation to demonstrate the inability to pay, making it a critical instrument in negotiating tax liability reductions.
How to Use the IRS Form
Using IRS Form 656 involves several steps and careful preparation. Taxpayers must first assess their eligibility, as not everyone qualifies for an Offer in Compromise. The IRS considers factors like income, expenses, asset equity, and overall financial situation.
-
Review Financial Information: Begin by gathering all necessary financial documents, such as income statements, bank account details, and details on assets and liabilities.
-
Determine Offer Amount: Calculate a reasonable offer amount that reflects the maximum the taxpayer can feasibly pay, either in a lump sum or through a payment plan.
-
Complete the Form: Fill out Form 656 accurately, ensuring all sections are completed with precise details about personal and financial circumstances.
-
Submit Additional Documentation: Provide supporting documents, including Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, to illustrate financial status.
-
Pay the Application Fee: Include the nonrefundable fee with the submission, unless eligible for a low-income waiver.
Steps to Complete the IRS Form
Completing IRS Form 656 requires attention to detail to avoid processing delays. The key steps are:
-
Personal Information: Enter the taxpayer’s personal data such as name, address, and Social Security Number.
-
Tax Liability Details: Include information about the type of tax, tax periods involved, and the total amount owed.
-
Offer Amount: Specify the amount being offered and the terms of the proposed payment, whether lump sum or periodic payments.
-
Reason for Offer: Clearly state the basis for the offer, whether it’s due to financial hardship, doubt as to collectability, or doubt as to liability.
-
Sign and Submit: Ensure the form is signed and dated before submission. Submit the form along with supporting documentation to the appropriate IRS address listed in the instructions.
Important Terms Related to IRS Form
Understanding specific terms related to IRS Form 656 is crucial:
- Offer in Compromise (OIC): A proposal to settle tax debts for less than the total owed.
- Doubt as to Collectability: A situation where the taxpayer’s assets and income are not sufficient to pay the full tax liability.
- Doubt as to Liability: Circumstances where there is legitimate uncertainty about the exact amount owed.
- Effective Tax Administration: When collection would cause economic hardship or be unfair, even if the taxpayer can fully pay.
- Financial Hardship: The taxpayer's inability to maintain basic living expenses if forced to pay the full tax debt.
Required Documents
Submitting Form 656 requires several additional documents to support the taxpayer’s offer and financial claim:
- Form 433-A (OIC) for individual taxpayers: Details personal financial situation including income, expenses, assets, and debts.
- Form 433-B (OIC) for businesses: Summarizes financial details of business assets, liabilities, income, and expenses.
- Income Documentation: Proof of income from wages, business income, pensions, or any other sources.
- Expense Verification: Bills, statements, or contracts that validate monthly living expenses.
Eligibility Criteria
The IRS sets stringent eligibility criteria for accepting an Offer in Compromise. Taxpayers should consider the following:
- Filing Compliance: All required tax returns must be filed, and current year estimated payments made.
- Financial Disclosures: Full disclosure of financials through Form 433-A (OIC) or 433-B (OIC).
- Reasonableness of Offer: The offer must reflect what can be reasonably collected from the taxpayer based on their financial situation.
- No Open Bankruptcy Proceedings: The taxpayer cannot be in an active bankruptcy case.
IRS Guidelines
The IRS provides guidance on offers in compromise through detailed instructions that accompany Form 656. Key points include:
- Compatibility: Taxpayers must use the correct form version and ensure it aligns with their tax year.
- Review Process: The IRS evaluates offers based on the ability to pay, income, expenses, and asset equity.
- Rejection and Appeal: If an offer is rejected, taxpayers have the right to appeal the decision.
Penalties for Non-Compliance
Non-compliance with IRS regulations when submitting an Offer in Compromise can lead to severe consequences:
- Rejection of Offer: Failing to provide complete and accurate information can result in immediate rejection.
- Increased Liability: Incorrect submissions may lead to additional penalties, interest, and continued collection efforts.
- Loss of Fees: Application and initial payment fees are non-refundable even if the offer is denied.
For taxpayers and tax professionals, thorough understanding and meticulous preparation are critical in successfully submitting an IRS Form 656 Offer in Compromise for the 2017 tax year.
