Definition and Purpose of IRS Form 656
IRS Form 656, commonly referred to as an Offer in Compromise (OIC), is a tax form used for settling tax liabilities with the IRS for less than the full owed amount. It is intended for individuals or businesses unable to pay their tax debts in full due to financial hardship. The form allows taxpayers to propose a reduced lump-sum payment or an installment plan to clear their obligations. Acceptance of the offer is contingent upon a rigorous assessment of the taxpayer's income, expenses, asset equity, and overall ability to pay.
Key Elements of IRS Form 656
- Personal Information: Essential details such as name, address, Social Security Number (SSN), or Employer Identification Number (EIN) for businesses.
- Reasons for Offer: Clear explanation of financial hardship that justifies the proposed compromise amount.
- Payment Terms: Options for either a lump-sum cash offer or periodic payments, including an initial payment with the submission.
- Future Compliance: Obligation to file future returns and pay taxes on time for five years following acceptance of the offer.
- Financial Statement Requirement: Submission of detailed financial documents to demonstrate inability to pay the full tax liability.
Steps to Complete IRS Form 656
- Gather Required Financial Documentation: Before filling out Form 656, compile all necessary financial records, including income statements, bank statements, and any other relevant documents.
- Complete Personal and Business Information Sections: Fill out all the personal or business information accurately to prevent processing delays.
- Decide on Offer Terms: Choose between the lump-sum cash option or the periodic payment offer based on current financial capabilities.
- Attach Financial Statements: Ensure all required financial documentation is attached to substantiate the inability to pay the full amount.
- Calculate Offer Amount: Base the proposed offer on an accurate assessment of disposable income and asset equity.
- Submit Initial Payment: Include at least 20% of the offer amount or the first installment with the application.
- Review and File: Thoroughly review the filled-out form and attached documents for accuracy before submission.
Eligibility Criteria for IRS Form 656
To qualify for an Offer in Compromise, a taxpayer must demonstrate genuine financial hardship or doubt as to the collectibility of the full tax amount owed. The IRS evaluates the taxpayer's reasonable collection potential, which considers:
- Current Income: Regular income sources and projected future earnings.
- Expenses: Record of necessary living expenses and liabilities.
- Asset Equity: Equity held in property and other significant assets.
- Compliance History: Must have filed all required tax returns and made required estimated tax deposits for the current year.
Important Terms Related to IRS Form 656
- Offer in Compromise (OIC): An agreement between the taxpayer and IRS to settle a tax debt for less than the owed amount.
- Reasonable Collection Potential (RCP): A calculation that assesses what the IRS believes can reasonably be collected from the taxpayer’s financial situation.
- Doubt as to Collectibility: A situation where the taxpayer's total assets and income are less than the amount of tax liability.
- Doubt as to Liability: Rare, but this occurs when there is a genuine dispute as to the existence or amount of the correct tax debt under the law.
Troubleshooting and Common Mistakes
- Incomplete Documentation: Failure to attach all necessary financial documents can lead to rejection.
- Incorrect Offer Amount: Offering an amount significantly lower than RCP often results in an unsuccessful application.
- Non-compliance with Tax Obligations: Any unfulfilled tax filings or payments can disqualify an applicant.
How to Obtain the IRS Form 656
IRS Form 656 can be downloaded directly from the IRS website in the forms and publications section. Tax professionals or authorized IRS offices also provide the form. Once downloaded, it can be filled out electronically or printed for manual completion.
Form Submission Methods: Online, Mail, or In-Person
- Online Submission: Form 656 cannot be submitted online directly but must be sent through mail with necessary supporting documents.
- Mail: Submit completed forms to the address specified for Offer in Compromise applications on the IRS website.
- In-Person: Although less common, taxpayers may submit in person at local IRS offices if specified under certain conditions.
Common Scenarios for Using IRS Form 656
- Self-Employed Individuals: Often used by self-employed taxpayers facing irregular income and substantial back taxes.
- Retired Taxpayers: Taxpayers on a fixed income can apply if their retirement funds are insufficient to cover full tax debts.
- Business Owners: Particularly beneficial for struggling small businesses looking to reconcile their tax liabilities while maintaining operations.
Penalties for Non-Compliance with IRS Form 656
Failure to adhere to the terms of an accepted Offer in Compromise, such as not filing future tax returns or missing payments, leads to revocation of the agreement. This results in reinstatement of the original tax debt minus any payments made, plus additional penalties and interest, thereby emphasizing the importance of compliance post-offer acceptance.
