The IRS Form 656 is a formal application that lets you negotiate with the IRS to settle your tax debt for less than what you owe through the Offer in Compromise (OIC) program. This is designed for taxpayers facing financial difficulty who cannot pay their full tax liabilities. The form requires precise completion and submission of comprehensive financial documentation to demonstrate your inability to pay the full amount.
What Is an Offer in Compromise?
An Offer in Compromise is an agreement between a taxpayer and the IRS to settle a tax debt for less than the full amount owed. The IRS considers it when the offered amount is the most they can reasonably collect within a reasonable timeframe. It helps taxpayers avoid harsher collection methods like wage garnishments, liens, or levies.
How Form 656 Works
Form 656 collects key information about your identity, tax debt, offer amount, payment method, and your financial situation to justify your offer. It must be filed with:
- Form 433-A (OIC): For individuals and self-employed taxpayers providing detailed financial statements.
- Form 433-B (OIC): For businesses, detailing income, expenses, assets, and liabilities.
Both forms are crucial as they provide the IRS with the financial picture needed to evaluate your offer.
Step-by-Step Instructions for Filling out Form 656
- Provide Personal Information: Enter your full name, current address, Social Security Number (SSN), or Employer Identification Number (EIN) accurately.
- Specify Tax Periods Covered: List all tax years or periods you want the offer to resolve. This ensures the IRS applies your offer correctly.
- Enter the Offer Amount: Propose a realistic settlement amount backed by your financial documentation. The IRS expects an amount that reflects your ability to pay.
- Indicate Offer Payment Option: Choose whether you are submitting a lump sum payment with your offer or a periodic payment plan. Each option has specific terms and timelines.
- Explain the Reason for Your Offer: Concisely describe your financial situation or hardship preventing full payment. Clear, honest information helps the IRS understand your circumstances.
- Sign and Date the Form: Your signature certifies that all information is truthful and complete.
- Attach Required Documents and Fees:
- Financial disclosure forms: Form 433-A (OIC) or 433-B (OIC).
- Application fee: Generally $205 (may be waived for low-income applicants).
Eligibility Requirements
You can apply if:
- You are current with all required tax filings.
- You have no pending bankruptcy.
- You can demonstrate that full payment is not possible due to financial hardship or other valid reasons.
Tips for a Successful Offer
- Complete and Accurate: Avoid errors or omissions. Providing thorough financial data is essential.
- Honesty Is Critical: The IRS investigates the information; dishonesty can lead to denial.
- Use the IRS OIC Pre-Qualifier Tool: This free IRS tool can help estimate your eligibility.
- Consider Professional Assistance: Tax professionals with OIC experience improve application quality.
- Keep Records of Everything: Retain copies of your submission and any correspondence.
Common Mistakes to Avoid
- Omitting financial forms like Form 433-A or 433-B.
- Proposing unrealistic offer amounts unsupported by your financial status.
- Failing to pay the application fee or missing initial payments.
- Skipping signatures or entering incomplete personal data.
- Ignoring IRS requests for additional information or missing deadlines.
Example Scenario
Sarah owes $15,000 but can only realistically afford $5,000 after monthly living expenses. She completes Form 656, attaches Form 433-A with her financial details, and pays the $205 fee. Upon review, the IRS accepts her $5,000 offer as the highest reasonable collection and resolves her liability.
Useful IRS and FinHelp Resources
- IRS Offer in Compromise
- IRS Form 656 Instructions (PDF)
- FinHelp’s Form 433-A Collection Information Statement
- FinHelp’s Form 433-B Collection Information Statement for Businesses
- FinHelp’s Offer in Compromise Process
- FinHelp’s Offer in Compromise Pre-Qualifier Tool
Following the IRS Form 656 instructions meticulously enhances your chance of settling your tax debt through an Offer in Compromise. Accurately presenting your financial situation with full documentation is key to persuading the IRS to accept your offer and helping you regain financial stability.