IRS Form 656-B, Offer in Compromise Instructions
It can be stressful when you owe money to the IRS but don’t have the resources to repay your tax debt. Interest and other penalties associated with missed tax payments can also make it difficult to get back on your feet. If you find yourself struggling to pay the IRS, it might be time to look into Form 656, Offer in Compromise (OIC), to help you settle your debt once and for all.
In this guide, we’ll go over Form 656 in detail to see if it’s the best option for your financial situation. Keep reading to learn about what Form 656 is, how to file, and more. If you’d like to skip to a particular section, use one of the links below.
- What is IRS Form 656?
- What is Form 656, OIC Used For?
- Where Can I Get Form 656?
- Form 656 Requirements
- Form 656 Instructions
- How Do I File Form 656?
- What Happens After My Offer in Compromise is Accepted?
What is IRS Form 656?
IRS Form 656 is an official document primarily used to help you settle your tax debt with the IRS. The form will allow you to provide the IRS with an overview of your financial situation and a written statement as to why you need your debt lowered. The IRS will take your declaration into account and assess other aspects, such as income, expenses, and quality of assets, before making a decision.
The goal of the form is to make a compromise that’s in the best interest of you and the IRS. However, submitting Form 656 doesn’t guarantee its acceptance. There’s a possibility that the IRS could reject your offer, meaning you still have to pay the original amount of your debt.
What is Form 656, OIC Used For?
Although Form 656 won’t eliminate your debt, it’s an opportunity to bargain for a much lower and more manageable amount. Taxpayers who find themselves unable to pay off their tax liability due to lack of funds or financial instability should use this form. Below, we’ll discuss two of the most common reasons individuals file Form 656.
Doubt as to Collectibility Collectivity
If you don’t have enough assets or income to pay off your tax debt, you would select this option as the reason for your offer. Choosing this doesn’t mean you’re in denial about the money you owe, but you don’t think you’ll ever have the resources to pay. Most taxpayers will fall under this category when submitting their form.
Exceptional Circumstances (Effective Tax Administration)
Exceptional circumstances refer to situations in which you have enough assets and income to pay your debt, but doing so would cause you to experience severe economic hardship. For example, if an individual has a medical condition and relies on costly treatments to stay alive and healthy, paying their tax debt could leave them vulnerable and without medication.
Where Can I get Form 656?
You can get Form 656 from Form 656-B, which is the Offer in Compromise Booklet. The booklet will allow you to view and download the necessary documents you need to submit your offer. It also includes instructions on how to file, but it’s highly recommended you work with a professional to complete it. It can be easy to make a costly mistake on such a complex form, which is the last thing you want.
Form 656 Requirements
To file Form 656, you must meet the following criteria:
- File all of the necessary and required tax forms
- Received a bill for the tax debt you’re making an offer on
- Made the required estimated payments for the current tax year
- tax deposits
You can also complete the Offer in Compromise Pre-Qualifier to determine your eligibility. Note that you can’t file if you currently have an open bankruptcy proceeding, audit, or innocent spouse claim.
If you meet the requirements stated above, you can move forward with your offer. The Offer in Compromise form has a fee of $205, but this can be waived if you meet the Low-Income Certification Guidelines.
Form 656, Offer In Compromise Instructions
Form 656 is composed of 9 sections, which can get incredibly overwhelming. We’ll go over the form from beginning to end, so you know what to expect.
Section 1: Individual Information
The first section of the form requires you to provide basic information, such as your name, Social Security number, and address. If you are married and file your taxes jointly, you must provide your spouse’s information as well. This section is specifically for individuals who file a 1040 tax return.
There are two subsections included here: Individual Tax Periods and Low-Income Certification. Under Tax Periods, you’ll select the type of tax return you’re including on your form. To see if you can get the $205 filing fee waived, you can fill out the Low-Income Certification portion.
Section 2: Business Information
Only fill out this section if your business is a corporation, partnership, LLC, or LLP. The information asked in this section is similar to the prior one.
Section 3: Reason for Offer
Here, you’ll be able to select between Doubt as to Collectibility or Exceptional Circumstances as your reason for submitting Form 656. If you go with the latter, you’ll have to include a written narrative that details your circumstance. You should also include additional documentation here to prove what you’re saying is true.
Section 4: Payment Terms
In this section, you must indicate your total offer, payment method, and initial payment. The amount of your initial payment is determined by a few factors, such as the payment method and offer. You’ll be choosing between the following two:
- Lump Sum Cash: In this case, you’re required to pay 20% of your total offer along with your form. For instance, if your offer was $3,000, you would send $850 to account for this and the fee. Once accepted, you have to pay the remaining balance off in less than five payments or within five months.
- Periodic Payments: If you decide to pay your debt in installments, the first payment will be sent along with your offer. You must pay the remainder within 6 to 24 months, depending on the payment plan agreed upon. Note that you must continue making these payments even if the IRS is still reviewing your offer. If you don’t, the IRS can deny your form and you won’t be able to appeal.
You’re not required to submit an initial payment or make periodic payments while you wait for a final decision from the IRS if you met the Low-Income Certification guidelines.
Section 5: Designation of Payment, Electronic Federal Tax Payment System (EFTPS), and Deposit
This section of the form is optional unless you’d like to apply your payment toward a tax debt from a specific year or make a deposit. In most cases, the money you submit along with your form is non-refundable. However, a deposit will be returned if the IRS rejects your offer. Additionally, if you send your initial payment and application fee as a deposit, your offer will be denied with no opportunity to appeal.
Section 6: Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements
You’ll provide the IRS with the source of your funding here. For example, if you took out a loan to repay your tax debt, you’ll write that down. Other sources of financing include borrowing money from a friend or relative and selling assets. When you make your payment, don’t send cash. Instead, write separate checks for your initial payment and application fee.
Section 7: Offer Terms
The offer terms are included in the application to ensure you comprehend that the form is a contract between you and the IRS. You don’t have to fill out anything here, but it’s essential to read it through and understand what you’re about to sign.
Section 8: Signatures
Finally, you’ll sign under penalty of perjury Form 656 in this section. When you sign, you’re acknowledging that everything on the application is true and correct. If you are filing the Offer in Compromise form jointly with your spouse, they must also provide their signature.
Section 9: Paid Preparer Use Only
This section must only be signed by a professional tax preparer like those at Community Tax. Using a tax professional ensures your form is filed correctly and can improve your chances for approval.
How Do I File Form 656?
Before you submit, make sure your application packet includes the following:
- Completed and signed Form 656
- Completed and signed Form 433-A, if applicable
- Completed and signed Form 433-B, if applicable
- $205 fee, unless low-income qualification are met
- Initial payment, unless low-income qualifications are met
Once everything is complete and ready to go, you’ll submit your offer to the IRS. There is no way to submit this form electronically, but you can make your payments via the Electronic Federal Tax Payment System.
Where to Mail Form 656?
Where you mail Form 656 depends on where you live. If you reside in Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, or Washington, mail your form to:
Memphis IRS Center COIC Unit
P.O. Box 30803, AMC
Memphis, TN 38130-0803
Individuals from states not mentioned above or those who live in a foreign country will need to send their form to:
Brookhaven IRS Center COIC Unit
P.O. Box 9007
Holtsville, NY 11742-9007
Once your offer is received, the IRS will review it and let you know whether it was accepted or not within a few weeks.
What Happens After My Offer in Compromise is Accepted?
Remember, the Offer in Compromise is a binding contract between you and the IRS. If it’s accepted, you must follow through with the payment plan set in place, so that you can pay off your tax debt. Failing to complete any of your responsibilities could result in the IRS revoking their acceptance and reinstating the total amount you owe.
In most cases, offers are rejected or returned due to missing information. According to the 2019 IRS Data Book, 54,225 Offer in Compromise applications were received, but only 17,890 were approved. Although the approval rate is less than 35%, the IRS will typically accept your offer if a good enough reason is given and you include the correct documents. Because of the form’s complexity, we recommend you seek professional tax help, as even a tiny mistake could cause your Offer in Compromise to be denied. At Community Tax, we’ll work diligently to ensure Form 656 reflects your current financial standing and is correctly filed. Contact us today for a free tax consultation!