Completing an IRS Offer In Compromise is easy if you understand each section of the form.
In this article:
- Section 1: Individual Information
- Section 2: Business Information
- Section 3: Reason for Offer
- Section 4: Payment Terms
- Section 5: Designation of Payment, Electronic Federal Transfer Payment System (EFTPS), and Deposit
- Section 6: Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements
- Section 7: Offer Terms
- Section 8: Signatures
- Section 9: Paid Preparer Use Only
IRS Form 656 Offer In Compromise (OIC)
IRS Offer In Compromise Pre-qualifier Tool
Through this tool, you can verify if you are a potential candidate. You will be automatically disqualified if you are currently going through a bankruptcy proceeding.
The tool will give you an idea of what the IRS considers an acceptable offer for your back taxes.
If you qualify, you can download the latest Form 656-B Offer In Compromise Booklet from the IRS website.
This booklet contains the following forms:
a. IRS Offer In Compromise application form
b. Form 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals, and
c. Form 433-B (OIC) Collection Information Statement for Businesses
These forms will help you evaluate what an acceptable offer is. You can base it on the assets, income, and potential cash flows you declared.
You will need a separate application form for each taxable entity you are filing for.
Section 1: Individual Information
This section is only for individual taxpayers who owe any of the following to the IRS:
a. Additional income tax for separately filed Form 1040 liabilities
b. Additional income tax for jointly filed Form 1040 liabilities
c. Businesses classified as either sole proprietors or disregarded limited liability corporations (LLCs).
d. Any trust fund recovery penalty tax
e. Any excise tax debt
Trust Fund Recovery Penalty Tax Definition: This is a kind of tax payment required for those who are individually responsible to remit withheld employment taxes.
Excise Tax Definition: This refers to any tax duty on a manufactured product levied at the time of production and not at the time of sale.
Section 1 of the Form 656 IRS Offer in Compromise requires personal information, such as:
b. Social Security Number (SSN)
c. Physical and/or mailing addresses
d. Name of spouse
e. Spouse’s SSN (if the OIC is for a joint tax liability)
f. Type of taxes and the tax periods you are paying for
g. Your household’s average gross income
You may also need the following tax forms for additional information:
a. Quarterly filed Form 941 Employee Withholding Taxes
b. Annually filed Form 940 Unemployment Taxes
c. Other civil penalties and federal taxes not listed, such as Form 2290 Highway Use Tax, Form 706 Estate Tax
If your income is below the state’s threshold, then you need not pay the application fee.
Section 2: Business Information
Only the following types of taxpayers should complete this section:
c. Limited Liability Partnerships (LLPs)
d. Limited Liability Corporations (LLCs)
Businesses pay a separate application fee of $186 along with the initial tax payment.
You need to provide the following general information about your business, such as business name and physical and/or mailing address.
Under the business name and addresses, choose the appropriate form:
a. Form 1120 Income Tax Year – for all corporate income tax periods you will pay
b. Form 941 Employers Quarterly Federal Tax Return – for all quarterly periods you will pay
c. Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return – for all FUTA tax liabilities, if any
Section 3: Reason for Offer
Section 3 covers all your reasons for your stated offer in the IRS Offer in Compromise form.
If you do not have sufficient money to cover your tax debt, then tick the box for Doubt as to Collectibility.
On the other hand, if you have enough money to cover your tax debt but doing so will give you economic hardship, then select the box for Exceptional Circumstances.
After selecting the applicable box, you may now provide further explanation about your current financial situation. Attach all appropriate documents to support your statement.
Section 4: Payment Terms
Section 4 is about your payment terms — your offer, your payment option, and the duration of your payments.
As stated, there are two available payment options for the IRS Offer in Compromise – lump sum cash payments and periodic payments.
For the lump sum cash option, you must initially pay 20% of your total offer amount. If you are eligible for the low-income certification, then the 20% initial payment is not required.
Afterward, you must pay off the remaining balance in 5 payments within 5 months upon acceptance.
To complete this part, enter your total offer, 20% of your total offer, and the details on your installment payments.
On the other hand, for periodic payment options, you must complete your payment in 6 to 24 monthly installments.
You must also remit your first payment along with your IRS Offer in Compromise form unless you are eligible for the low-income certification.
Enter your offer’s total amount which should be equal to the sum of all your monthly payments.
Next, put the details of your first monthly payment.
It is important to remember for this option you should continuously remit monthly payments while your IRS Offer In Compromise form is still processing.
If you qualify for the low-income certification, then you don’t need to make such payments. Otherwise, failure to comply will lead to rejection of your IRS Offer in Compromise form.
Section 5: Designation of Payment, Electronic Federal Transfer Payment System (EFTPS), and Deposit
This section covers your initial down payment, along with additional deposits, if any.
Here you can designate your initial tax payment for any tax period. Any additional payment you remit will be considered as your deposit.
When making additional payments, remember to check the corresponding boxes. Otherwise, the IRS will reject your Offer In Compromise form.
Section 6: Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements
This tackles your source of funds and payment options for your offer on back taxes.
First, briefly explain your source of funds for your payments.
Second, create two separate checks for your offer payment and your offer application fees, respectively. Make these checks payable to the United States Treasury.
To avoid delay, remember not to send cash along with the other tax payments.
For your filing requirements, make sure that you have already filed all the required tax returns.
Under the Tax Payment Requirements, check all the boxes applicable to you or your business with regards to making and estimating tax payments.
Section 7: Offer Terms
Section 7 discusses the Form 656 terms, conditions, and legal agreement.
It is very important that you review all the terms and conditions before placing your signature.
Form 656 IRS Offer In Compromise is a legal agreement that binds you and the government to settle for an amount less than your legal tax obligation.
If you do not comply with the IRS Form 656 offer terms, then your application will be rejected. The IRS will then continue to collect the original amount you owe.
Section 8: Signatures
Here is where you mark your signature along with the date of signing.
If the OIC is a joint offer, then both parties should sign the form.
If it is an offer from a corporation, then the name of the corporation, along with the name, title, and signature of the authorized corporate officer should be placed.
Section 9: Paid Preparer Use Only
This section is only for a paid preparer.
If you hired a tax professional to prepare and submit your IRS Offer In Compromise form, then your tax preparer must complete this area.
Also, if you are authorizing your tax professional to represent you during an IRS Offer In Compromise investigation, then you must also attach any of the following:
a. Signed Form 2848 Power of Attorney and Declaration of Representative
b. Signed Form 8821 Tax Information Authorization
Submitting your IRS Form 656 marks the beginning of the IRS’ evaluation of your Offer In Compromise form. They will consider your circumstances, along with your supporting documentation in making a decision.
The whole process starts with filling out the applicable Form 433 and then proceeding to Form 656. To ensure completeness, you can take a look at the IRS Form 656 checklist to make sure you did not leave anything behind.
How do you prepare for filling out Form 656? Share your thoughts below!