Definition & Meaning
Form 656 is primarily used for submitting an Offer in Compromise (OIC) to the Internal Revenue Service (IRS). This form allows taxpayers to propose settling their tax liabilities for less than the full amount owed. The purpose of the OIC is to provide eligible individuals or businesses with financial relief, especially when paying the full amount would create an undue economic burden.
Key Concepts
- Offer in Compromise (OIC): A program allowing taxpayers to settle tax debt for less than they owe.
- Eligibility: The IRS reviews the taxpayer's income, expenses, asset equity, and overall financial situation.
Steps to Complete Form
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Gather Financial Information: Collect all relevant financial documents, such as pay stubs, bank statements, and expense reports. This will help accurately report financial details required by the IRS.
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Fill Out Form 656: Begin by entering your personal information, detailing your financial situation, and proposing an amount you can pay. It's crucial to be truthful and thorough to avoid rejection.
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Calculate Offer: Use IRS guidelines to determine an acceptable offer amount based on your income and asset valuation.
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Attach Required Documentation: Include all supporting documentation about your financial status. This typically involves forms like 433-A or 433-B for individual or business financial disclosures.
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Sign and Submit: Double-check the form for accuracy, sign it, and submit with the required initial payment or application fee to the IRS.
Required Documents
- Pay Stubs: Recent pay stubs to substantiate income.
- Bank Statements: All account summaries showing current balances.
- Asset Information: Details of owned property, vehicles, or other valuable assets.
- Expense Documentation: Receipts or bills for utilities, rent/mortgage, and other necessary expenses.
Supporting Forms
- Form 433-A: For individuals, providing a detailed financial statement.
- Form 433-B: For businesses, outlining business assets, income, and expenses.
Eligibility Criteria
To be eligible for submitting Form 656, you must meet specific criteria:
- Inability to Pay: You must demonstrate the financial inability to pay the full tax debt within the statutory period.
- Compliance: You should be in compliance with filing and payment requirements. This means all tax returns, including those for self-employment or unemployment, must be filed up to date.
Financial Evaluation
The IRS considers your:
- Monthly income against allowable expenses.
- Asset equity.
- Future earning potential.
IRS Guidelines
The IRS evaluates Offers in Compromise using a strict set of guidelines to ensure the program is accessible to those genuinely unable to pay their tax debts.
- Reasonable Collection Potential (RCP): The IRS calculates your ability to pay, considering your income, expenses, and asset equity.
- Payment Methods: Two primary payment options are available: lump sum cash payments or periodic installment plans.
Legal Use of Form
The completion and submission of Form 656 must adhere to legal protocols set by the IRS.
- Truthful Representation: Information provided must be accurate and complete under penalty of perjury.
- Binding Agreement: Once accepted, the OIC becomes a legally binding contract between the taxpayer and the IRS.
Responsibilities Post-Acceptance
- Tax Compliance: You must remain compliant with all tax laws, including filing timely returns and paying required taxes for at least five years after acceptance of the OIC.
Form Submission Methods
- Online Submission: Taxpayers can submit Form 656 electronically using the IRS’s Online Payment Agreement application for efficiency and record-tracking.
- Mail Submission: Forms can also be mailed with documented proof of financial hardship.
- In-Person: Submissions can be made at a local IRS office for an in-person consultation and review.
Penalties for Non-Compliance
Failing to comply with OIC terms can lead to:
- Revocation of the OIC agreement.
- Reinstatement of full tax liability.
- Possible legal actions or garnishment proceedings.
Consequences:
Non-compliance might also impact your future eligibility for an OIC or similar relief programs.
