The IRS has long been portrayed by pop culture as a cruel and unforgiving branch of the United States government. The name conjures images of a cold-hearted system using complex language to confuse citizens, and then doles out harsh penalties at the slightest infraction. Simply the word “audit” can stir up fear in the hearts of taxpayers across the country. But is the IRS really as scary as it seems?
You may be surprised to discover that the IRS is much more understanding than you think. While getting into debt with the IRS is surely serious business, it’s not as unforgiving as you may think. The IRS offers a wealth of payment options to those in debt. If you have outstanding debt to settle with the IRS, you may have already heard of IRS payment plans. They’re the most readily available option for those in debt, and allow taxpayers to pay off IRS debt over the course of 72 months. But for some, 72 months simply isn’t enough.
If you’re in substantial debt with the IRS and payment, even over the course of 72 months, would cause you extreme financial hardship, the IRS Offer in Compromise may be the best solution for your financial needs. Read on to learn about the IRS Offer in Compromise and corresponding IRS Form 656, to determine whether this is the best option for you.
IRS Form 656: About the Offer in Compromise
The IRS Offer in Compromise is a contract between a taxpayer and the IRS, through which the taxpayer proposes a portion of their outstanding tax debt as sufficient coverage for the entire owed amount. It essentially allows you to offer the IRS a lower sum of money than your total outstanding debt. For instance, you may owe the IRS $20,000, but through an Offer in Compromise, you can propose with reasoning to the IRS that $15,000 will be sufficient payment to settle your IRS debt. The IRS will then review your proposal and either accept or reject it.
This process is completed through IRS Form 656, the Offer in Compromise Form, through which the IRS collects information about you, your household, employment, assets, expenses, and more. In this form, you are also given the opportunity to calculate your minimum offer, reasons for offer, payment process, and more. It is submitted along with any supporting evidence or documentation and is then returned to the IRS. This is the application that the IRS will review and use to determine whether your offer is acceptable.
Reasoning for an Offer in Compromise
A taxpayer can qualify for an Offer in Compromise for 3 main reasons:
- There is a doubt as to liability of the taxpayer for the outstanding debt
- There is a doubt that “the amount owed is fully collectible”
- Based on “effective tax administration”
Any reasoning on your IRS Form 656 that you should be responsible for only a portion of your total outstanding tax debt must fall into one of these three categories in order to be approved, or even considered. Let’s review each of these reasons in more detail.
Doubt As To Liability
In order to qualify for a Form 656 Offer in Compromise under a doubt of liability, there must be a genuine argument against the “existence or amount of the correct tax debt under law”. In essence, this argument states that the amount of debt that the IRS claims you owe is incorrect. This may be due to a miscalculation, mistakes in documentation or reporting, or another error. Proper documentation provided alongside your IRS Form 656 to support this argument should not only highlight the incorrect information, but also provide the correct information.
Note that if you do believe that a mistake has been made that has landed you in debt with the IRS, you first must dispute your tax debt via other channels, such as submitting a dispute or requesting a refund. It is only once these options are exhausted that an OIC regarding a doubt as to liability will be considered.
Doubt As To Collectibility
A doubt as to collectibility is the most common argument for an Offer in Compromise. The doubt as to collectibility argues that, although you know that you are liable for the entire amount of debt, there’s no possibility that you’ll ever be able to pay the full debt. You don’t have the cash on hand, you don’t have assets that can be liquidated for cash, and there’s no possibility that you could get a loan for the money.
Unlike the doubt as to liability, the doubt as to collectibility is pre-qualified based on a calculation of the information that you provide on your Form 656. That calculation is as follows:
- The IRS determines your equity in your assets by totalling the value of any asset for which your debt is less than the value of your asset.
- The IRS determines your collectability by totaling your income and subtracting the cost of your necessary household expenses. This number is then multiplied by 12 to determine your total collectability.
- The IRS combines your equity in your assets plus your total collectibility.
If the final value is less than the cost of your debt, then you may qualify for an offer in compromise based on a doubt as to collectibility.
Effective Tax Administration
This is the least common argument for an Offer in Compromise. It is an argument that, although you know you owe the total amount and you know that the total amount is collectible, the IRS should not collect the total amount. This should only be used in extreme or exceptional circumstances in which collection of your total debt amount would cause extreme financial hardship, or it would be unfair or inequitable. For instance, you have a serious medical condition and collection of the total debt amount would lead to your death. Again, this argument requires that you prove extensive evidence along with IRS Form 656.
How To Complete IRS Form 656
Unlike other IRS tax forms, the Offer in Compromise Form must be submitted as a part of your total OIC application package, which must also include payment for an application fee, the total payment for your initial offer, and documentation with evidence to support your reasoning for an Offer in Compromise. Let’s review each element of the application package:
- Form 656: This form is used to provide the IRS with a picture of your entire financial situation, including your cash, assets, income, credit, and debt. It also provides information about your household and household expenses.
- Form 433-A (for individual wage earners) or 433-B (for a business or corporation): These forms are used to calculate the amount of your offer in compromise as well as an explanation of any special circumstances that should be considered alongside your finances
- Documentation: Each form you complete will require a number of documents supporting each claim you make. You will need to provide a copy of every requested document in order to be considered. Do not send the IRS original documentation.
- Payment: Each application requires a $186 application fee. Along with your application, you are also required to provide your initial payment for your proposed Offer in Compromise.
The IRS will then review your Offer in Compromise. They will be in contact if they require any additional information. You also may need to continue to make your proposed Offer in Compromise payments regularly while your application is under review. The IRS will be in contact to let you know if your offer has been approved or rejected.
If you owe taxes and have debt with the IRS, you don’t need to face them alone. At Community Tax, our experts are well versed in communication and negotiation with the IRS, and we will work tirelessly on your behalf to come to a solution that works for you. Contact us today to learn more about an Offer in Compromise and see if this is the right solution for your needs.