Tax debt can feel like a weight on your shoulders, and the process of getting relief shouldn’t add to the stress. If you’ve heard about Form 656 and the offer in Compromise option, you know it’s a potential way out, but filing the form? That’s where most people get stuck.
The truth is, filing Form 656 is not as simple as it seems. You might be unsure about which documents to include, how to prove your ongoing severe situation, or even if you qualify in the first place. It’s no wonder that many give up before they even submit their forms, leaving their tax debt unresolved.
What makes the process even worse is that mistakes on Form 656 can delay or even deny your offer in compromise, wasting valuable time and adding to your frustration. Each mistake could set you back weeks or even months, leaving you stuck with the same tax problems you’re trying to escape.
That’s exactly why you need this guide. We’ll walk you through the exact steps of filing Form 656 correctly so you don’t have to guess or second-guess yourself.
What is Form 656?
Form 656 is used to apply for an Offer in Compromise (OIC) with the IRS, which allows you to pay a reduced amount to clear your tax debt. This form is typically used when paying the full debt isn’t possible without causing financial hardship or when you believe the tax debt amount is incorrect.
How to Fill Out Form 656?
Filling out Form 656 may seem like a daunting task, but don’t worry we’ll break it down for you step by step.
Section 1: Individual Information and Low-Income Certification
This section asks for your personal details, the tax periods you owe, and whether you qualify for Low-Income Certification.
- Personal Info: Your name, SSN, ITIN (if applicable), and address.
- Tax Periods: List the types of taxes and years you owe, such as Form 1040 or employment taxes.
- Low-Income Certification: Check if your income meets the criteria to waive fees and initial payments.
Fill out this section to provide basic information and determine eligibility for reduced fees.
Section 2: Business Information
This section collects details about your business and any tax debts owed.
- Business Details: Provide your business name, address, Employer Identification Number (EIN), and the contact person’s information.
- Tax Periods Owed: List the tax forms and periods for business taxes owed, including:
Complete this section if your Offer in Compromise is for business tax debt.
Section 3: Reason for Offer
This section asks you to select the main reason for your Offer in Compromise. Choose only one option:
- Doubt as to Collectability: You can’t pay your full tax debt with your current assets and income. Use Forms 433-A(OIC) and 433-B(OIC) to calculate your minimum offer.
- Effective Tax Administration – Economic Hardship: You can pay the full debt, but doing so would cause severe financial hardship due to special circumstances. Attach a detailed explanation.
- Effective Tax Administration – Public Policy or Equity: You can pay, but collecting the full amount would be unfair due to exceptional situations (e.g., payroll errors). Attach a detailed explanation.
Section 4: Payment Terms
Choose how you will pay your Offer in Compromise:
1. Lump Sum Payment:
- Pay in 5 or fewer payments within 5 months.
- Include 20% of the offer amount upfront (waived for Low-Income Certification).
2. Periodic Payment:
- Pay monthly over 6 to 24 months.
- Include the first month’s payment with your offer (waived for Low-Income Certification).
Note: You must continue making payments while your offer is under review. Missing payments can result in the rejection of your offer.
Section 5: Designation of Payment and Electronic Payments (EFTPS)
Designation of Payment:
- Specify if you want your payment to apply to a specific tax year or type of tax debt (e.g., employment taxes or penalties).
- If not specified, payments will be applied in the government’s best interest.
- Note: Payments made with your offer cannot be used as estimated tax payments for any year.
Electronic Federal Tax Payment System (EFTPS):
- List any payments made through EFTPS, including the Offer application fee and Offer payments.
- Provide the date and the 15-digit electronic funds transfer number for each payment.
Ensure your payments are correctly designated to avoid confusion with the IRS.
Section 6: Source of Funds, Payments, and Filing Requirements
Source of Funds:
- Indicate where you will get the money to pay your offer amount (e.g., savings, loan, etc.).
Making Your Payment:
- Submit separate checks for the application fee and offer payment.
- Make checks payable to the “United States Treasury.”
- You can also pay electronically through the Electronic Federal Tax Payment System (EFTPS).
Filing Requirements:
- Check the box if you have filed all required tax returns and include a copy of any recent returns filed within the last 12 weeks.
- Check if you were not required to file a tax return for specific years.
Tax Payment Requirements:
- Confirm whether you’ve made all required estimated tax payments and federal tax deposits for the current and past two quarters.
Complete this section to ensure your offer is processed without delays.
Section 7: Offer Terms
This section covers what you agree to when submitting your Form 656 Offer in Compromise.
- Offer Acceptance: You request the IRS to accept the amount you’ve offered to settle your tax debt. They may adjust your offer if you missed any liabilities.
- Payment Use: Payments go directly to your tax debt and won’t be refunded. If you qualify for Low-Income Certification, no initial payment is needed.
- Your Responsibilities: You must file and pay taxes on time for the next five years. No changes or refunds for tax periods listed in the offer.
- Default Consequences: If you don’t follow the terms, the IRS can revoke the agreement and collect the full debt amount.
- IRS Actions: They may file a lien, contact third parties for expert tax lien help, or apply any refunds to your debt.
- Shared Responsibility Payment (SRP): If your offer includes SRP, you must pay it off completely before the offer is finalized.
- Public Information: Some details about your offer may be made public. You’ll use IRS Secure Messaging for any official updates.
This section ensures you understand the terms and consequences of your Offer in Compromise.
Section 8: Signatures
- Sign and Date: You and your spouse (if applicable) need to sign and date the form.
- Phone Authorization: Check the box to let the IRS leave detailed messages on your phone.
This confirms that all information is accurate and you agree to the terms.
Section 9: Paid Preparer Use Only
This section is for use by the tax preparer who helped complete your form.
- Preparer’s Information: Preparer must sign and date the form, and provide their phone number. Include the preparer’s name, CAF number or PTIN, and firm’s details.
- Phone Authorization: Check the box to allow the IRS to leave messages for the preparer.
If you want someone to represent you during the process, include Form 2848 for representation or Form 8821 to authorize someone to receive confidential information.
Forms Included in the 656 Booklet
The 656 Booklet includes several important forms besides Form 656 IRS:
- Form 433-A (OIC): For wage earners and self-employed individuals to provide detailed financial information.
- Form 433-B (OIC): For businesses to submit their financial details.
Typically, individuals only need to fill out Form 433-A. If you have a business, you may need to complete both forms. Each form requires specific details, so make sure you’re using the right one for your situation.
What Is Form 656-L?
Form 656-L is used to dispute the amount of tax you owe if you believe it was assessed incorrectly. Unlike other Form 656 Offer in Compromise, this one focuses only on questioning the liability of the tax amount, not your ability to pay.
When to Use It?
- Use Form 656-L if you have a valid reason to believe the tax debt is incorrect.
- It doesn’t require financial information because it’s about whether you actually owe the amount, not whether you can pay it.
When Not to Use It?
- Don’t use this form if a tax court has already ruled on your liability.
- Don’t use it if you’re requesting a reduction because you can’t afford to pay—use Form 656 B for that.
Tip: Always complete Form 656-L first if you’re disputing the tax amount. If it’s accepted but you still owe more than you can pay, you can then submit the IRS 656 Form.
In Closing!
Getting Form 656 B or just 656 right could be the turning point you need in managing your tax debt. By carefully following the steps and providing accurate information, you can significantly improve your chances of securing a Form 656 Offer in Compromise with the IRS.
Here’s something you might not know: Before submitting Form 656, you can request a Pre-Qualifier tool from the IRS, which helps determine if you’re eligible for an Offer in Compromise before you even apply. This tool is available on the IRS website and can save you time by ensuring you’re on the right track.
For expert guidance, get in touch with Peter Salinger, a tax expert Jacksonville. With his experience in IRS Offer in Compromise Form 656, he’ll ensure your application is filed correctly, boosting your chances of approval and helping you move forward with confidence.
As an International Tax Advisor, Peter can help with foreign-related tax issues like expatriate tax planning, foreign asset reporting, and tax compliance for U.S. citizens living abroad.
