Qualify For An IRS Offer In Compromise: A Step-by-Step Guide to Completing Form 656

Orlando R. Dizon

·April 16, 2024

·10 min read

Qualify For An IRS Offer In Compromise: A Step-by-Step Guide to Completing Form 656 — Image Source: unsplash

Understanding the IRS Offer in Compromise

An Offer in Compromise (OIC) is a program provided by the Internal Revenue Service (IRS) that allows qualifying individuals to settle their tax debt for less than the full amount owed. This option is available to taxpayers who are experiencing significant financial hardship and are unable to pay their taxes in full.

What is an Offer in Compromise?

An Offer in Compromise is essentially a formal agreement between a taxpayer and the IRS, where the taxpayer proposes a reduced amount as payment for their outstanding tax liabilities. It provides eligible taxpayers with a path to resolve their tax issues and achieve a fresh start financially. By accepting an OIC, the IRS agrees to forgive the remaining tax debt, allowing the taxpayer to settle their obligations for an amount that they can afford.

Benefits of an Offer in Compromise

Debt Relief: The primary benefit of an OIC is that it offers significant relief from overwhelming tax debt. It enables taxpayers to resolve their tax liabilities and move forward with a clean slate.
Financial Flexibility: Qualifying individuals have the opportunity to negotiate a manageable payment plan based on their current financial situation.
Avoiding Legal Action: By successfully obtaining an OIC, taxpayers can avoid potential legal actions such as wage garnishment, bank levies, or property liens.

How to Qualify For An IRS Offer

To qualify for an IRS Offer in Compromise (OIC), individuals must meet specific eligibility criteria and demonstrate significant financial hardship. Understanding these requirements is crucial for those seeking to settle their tax debt through this program.

Eligibility Criteria

Filing All Required Tax Returns

One of the primary eligibility criteria for an OIC is filing all required tax returns. This means that individuals must ensure they have submitted all necessary tax documents for the applicable years. Failure to file required tax returns may disqualify taxpayers from being considered for an OIC.

Making All Required Estimated Tax Payments

In addition to filing tax returns, it is essential to make all required estimated tax payments. This includes staying current with any estimated tax payments or withholding obligations. The IRS expects individuals to fulfill their tax payment responsibilities as part of the eligibility assessment for an OIC.

Understanding Financial Hardship

Assessing Your Ability to Pay

When applying for an OIC, individuals are required to assess their ability to pay. This involves a comprehensive review of their financial situation, including income, expenses, assets, and liabilities. The IRS evaluates this information to determine whether the taxpayer genuinely lacks the means to pay the full amount of their tax debt.

Doubt as to Liability vs. Doubt as to Collectibility

Applicants should understand the distinction between doubt as to liability and doubt as to collectibility when seeking an OIC. Doubt as to liability arises when there is a genuine dispute regarding the existence or amount of the assessed tax debt. On the other hand, doubt as to collectibility pertains to situations where the taxpayer acknowledges the validity of the debt but is unable to pay it in full due to financial hardship.

It's important for individuals considering an OIC to carefully evaluate these eligibility criteria and factors related to financial hardship before initiating the application process.

A Step-by-Step Guide to Complete Form 656

Completing Form 656 is a critical step in the process of applying for an Offer in Compromise (OIC) with the IRS. This section provides a comprehensive guide on gathering necessary documentation, filling out Form 656, and submitting it for consideration.

Gathering Necessary Documentation

Before initiating the completion of Form 656, it is essential to gather all the required documentation to support your application. The following are key pieces of information and documentation that you will need:

Financial Information

Gather detailed financial information including income statements, expense records, asset details, and liabilities. This information is crucial for the IRS to assess your financial situation accurately.

Tax Filing Status

Ensure that you have up-to-date information regarding your tax filing status. This includes any recent tax returns filed, as well as details about your current tax filing status.

Filling Out Form 656

Once you have gathered all the necessary documentation, it's time to proceed with filling out Form 656. This form requires detailed information about your financial situation and outstanding tax debt.

Personal Information Section

In this section, provide accurate and up-to-date personal information including your full legal name, social security number, address, and contact details.

Tax Debt Information Section

Detail all relevant tax debt information in this section. Include specifics about the type of taxes owed, the tax periods involved, and the total amount of tax debt outstanding.

Payment Terms Section

When completing this section, carefully consider and propose suitable payment terms based on your financial capacity. You will need to calculate a preliminary offer amount based on your financial information and tax filing status.

Submitting Your Form 656

After completing Form 656 accurately and thoroughly, it's time to submit it along with any required payments or fees.

Including the Application Fee and Initial Payment

As a part of the submission process for Form 656, ensure that you include the necessary application fee along with an initial payment. This demonstrates good faith on behalf of the taxpayer and is treated as a deposit by the IRS upon receipt.

Mailing Instructions

Follow specific mailing instructions provided by the IRS for submitting Form 656. It's crucial to adhere to these instructions meticulously to ensure that your application is received promptly and processed efficiently.

By following these step-by-step guidelines for completing Form 656 accurately and thoroughly, individuals can enhance their chances of having their Offer in Compromise application considered by the IRS.

After Submitting Form 656: What Comes Next?

IRS Review Process

Once Form 656 has been submitted to the IRS, the application undergoes a thorough review process. This involves an in-depth assessment of the provided information and documentation to determine the eligibility and validity of the Offer in Compromise (OIC) request.

The IRS review process typically includes a comprehensive evaluation of the applicant's financial situation, tax debt details, and adherence to the submission requirements. The goal is to ensure that all necessary information has been accurately provided and that the applicant meets the eligibility criteria for consideration.

During this stage, it's essential for applicants to remain responsive to any additional requests or inquiries from the IRS. Promptly providing any further documentation or clarification can expedite the review process and demonstrate cooperation with the IRS's assessment procedures.

Potential Outcomes

Acceptance

If the IRS approves an Offer in Compromise, it signifies debt relief for qualifying individuals. The acceptance of an OIC means that the taxpayer can settle their tax liabilities for an amount less than what they owe. This outcome provides a significant opportunity for individuals to achieve financial stability by resolving their tax debts through a manageable payment plan.

Rejection and Appeal Options

In cases where an Offer in Compromise is rejected by the IRS, individuals have recourse through various appeal options. It's crucial for applicants to understand their rights and avenues for challenging a rejection decision.

One option available is to request a reconsideration of the OIC within 30 days from the date of rejection. During this reconsideration process, applicants can provide additional information or address any discrepancies identified by the IRS during their initial review.

Another avenue for appeal is filing a formal appeal with the Office of Appeals within 30 days from receiving notice of rejection. This involves presenting a compelling case supported by relevant evidence to contest the decision made by the IRS.

It's important for individuals facing rejection to carefully assess their options and seek professional guidance if necessary when pursuing an appeal. Understanding these potential outcomes empowers applicants to navigate through post-submission processes effectively.

By comprehending both potential outcomes—acceptance and rejection—and being prepared with knowledge about appeal options, applicants can approach their Offer in Compromise submission with informed expectations regarding what comes next.

Final Thoughts

After completing the process of applying for an IRS Offer in Compromise (OIC), it's essential to consider the next steps and prepare for potential outcomes. Here are some key considerations to keep in mind as you await a decision from the IRS.

Preparing for Success

While awaiting the IRS's review of your Offer in Compromise application, it's crucial to maintain open communication and cooperation with the IRS. Promptly responding to any requests for additional information or documentation can expedite the review process and demonstrate your willingness to engage constructively.

Additionally, staying informed about the progress of your application and being prepared to provide any necessary updates can contribute to a smoother review experience. By proactively addressing any inquiries or requests, you can position yourself for a more favorable outcome.

It's also advisable to use this waiting period to plan for potential scenarios following the IRS's decision. Considering alternative options and preparing a financial strategy based on different outcomes can help you navigate through post-submission processes more effectively.

Seeking Professional Help

Navigating through the complexities of tax debt resolution and the Offer in Compromise program can be daunting. Seeking professional assistance from qualified tax professionals or legal advisors is highly recommended, especially if you encounter challenges during the application process or face rejection.

Experienced professionals can provide valuable insights, guidance, and representation throughout the OIC application journey. They can assist in accurately assessing your financial situation, ensuring compliance with IRS requirements, and advocating on your behalf during reviews or appeals.

Moreover, professional assistance can enhance your understanding of your rights, responsibilities, and available options within the OIC program. Whether it involves interpreting complex tax regulations or strategizing an effective approach for appealing a rejection decision, professional help can significantly impact your overall experience with an Offer in Compromise.

By seeking professional assistance when needed, individuals can access specialized expertise that complements their efforts in pursuing an OIC successfully. Collaborating with professionals who understand the intricacies of tax debt resolution can ultimately contribute to a more informed and empowered approach towards achieving financial stability.

In conclusion, maintaining proactive engagement while awaiting a decision from the IRS and seeking professional help when necessary are pivotal aspects of navigating through an Offer in Compromise submission effectively. These considerations play a significant role in shaping a well-informed and strategic approach towards resolving tax liabilities through this program.

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Attorney Orlando R. Dizon | Tax Resolution, Esq | Houston Tax Resolution Attorneys