IRS Form 656, Settling Your IRS Tax Debt Using an OIC

If you have tax debt owed to the IRS that you can’t afford to pay, you can apply for an offer in compromise (Form 656). This program allows eligible taxpayers to pay off their debts to the IRS in installments because it would be impossible for them to pay all at once. The IRS reviews all applications thoroughly, so you should familiarize yourself with the necessary procedure before submitting one.

What Is Form 656?

The official application for requesting an Offer in Compromise is called Form 656. It will allow taxpayers to offer a lesser amount to cover their federal tax debt. The IRS accepts offers only if it thinks it can get the lowest possible amount of money that it can reasonably collect.

Once an eligible tax debt is resolved with an accepted Offer in Compromise, the debt will no longer be considered eligible for resolution. Whenever you are having doubts, visit an IRS law firm and get their assistance.

Who May Qualify?

Not all people who have tax debt are eligible for an Offer in Compromise. The IRS takes a number of factors into consideration when making a decision, such as:

·        Current income

·        Monthly living expenses

·        Available assets

·        Future earning potential

·        Ability to pay overall

If the financial hardship is great, or the assets and income are not reasonably expected to cover the total tax amount, generally, taxpayers may be good candidates.

The information required for Form 656

When completing Form 656, it's not just a matter of suggesting a settlement amount. Applicants will need to include supporting financial information and documentation such as:

1.     Financial statements for personal or business use.

2.     Income verification

3.     Bank account information

4.     Asset valuations

5.     Monthly expenses

6.     Outstanding debts

7.     Tax returns if necessary

For most applicants, Form 433-A (OIC) or Form 433-B (OIC) must also be filed, and a proper application fee and initial payment (unless eligible for a low-income exception) are due.

How Does the IRS Review an Offer?

Once the application is received, the IRS thoroughly reviews the taxpayer's financial status. While it is in the review process, it can:

a.     Verify financial documents

b.     Request additional information

c.      Assess the taxpayer's reasonable collection potential (RCP)

d.     Look at the settlement offer and compare it to what the IRS thinks they could collect if they didn't offer the settlement.

If the IRS believes this offer is reasonable, then they may accept the settlement. In any other case, the offer might be declined or returned if desired. Hiring a professional tax person (like a tax credit attorney) will certainly make your job much easier.

Helpful Tips

With good preparation, you'll stand a better chance of success with a submission.

1.     Make sure that all necessary tax forms are submitted.

2.     Pay all estimated taxes required prior to application.

3.     Clean up and provide full and accurate financial paperwork.

4.     Make careful calculations of income and expenditures.

5.     Provide the IRS with any information requested promptly.

6.     Do not inflate or deflate expenses or assets.

These Are the Common Mistakes to Avoid:

Many times, Offer in Compromise applications are delayed or denied due to common mistakes, including:

·        Sneaking in on the tax tail - this is better described as filing before becoming tax compliant.

·        Not completing application sections. Incompleteness of sections of the application.

·        Providing out-of-date financial data

·        Offering an unrealistically low settlement amount

·        Not submitting requested documentation on time

·        Spending time to prepare well will save months of unnecessary delays.

While Form 656 can be filled out by the taxpayer, financial aid might be helpful in cases of complex financial situations, huge tax debts, or business-related liabilities. CPA professionals are aware of the IRS evaluation process and can assist in preparing supporting documentation, provide a reasonable offer, and effectively deal with IRS review.

If you are eligible, you can use Form 656 to settle your federal tax debt for less than the amount you owe. The application process involves a thorough financial disclosure and careful preparation, but providing comprehensive and accurate information can enhance the chances of success. If you feel that you qualify for an Offer in Compromise, it is vital to understand the requirements and make a good application so that you may attain long-term financial stability.