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1. What is an Offer in Compromise (OIC)?

   An Offer in Compromise is a program that allows taxpayers to settle their tax debt for less than the full amount owed. It is designed for taxpayers who are unable to pay their full tax liability, or doing so would create financial hardship. The aim is to agree on an amount that is doable for the taxpayer, while also being acceptable to the IRS.

2. Who is eligible for an OIC?

   Eligibility for an OIC requires that you have filed all required tax returns, received a bill for at least one tax debt included in the offer, made all estimated tax payments for the current year, and, if applicable, made all required federal tax deposits for the current quarter. If any required tax returns have not been filed, the IRS will return the OIC application.

3. Can I apply for an OIC if I am in bankruptcy or have an open audit?

   No, if you or your business is currently in an open bankruptcy proceeding, you are not eligible for an OIC. Likewise, you should resolve any open audits or outstanding innocent spouse claims before submitting an OIC application. These situations must be resolved within their own contexts before the IRS can consider an OIC.

4. What if I can pay the full amount through another method?

   The IRS generally will not accept an OIC if you can pay your tax debt in full through an installment agreement or by using the equity in your assets. However, certain allowances and exclusions may be applied to your case during the IRS’s evaluation of your offer.

5. What happens to future tax refunds if my OIC is accepted?

   Any tax refunds due to you up to the calendar year the IRS accepts your OIC will be applied to your tax debt. These refunds are not considered part of your OIC payment.

6. What is Doubt as to Liability?

   If you believe that you do not owe part or all of the tax debt, you can submit a Form 656-L, Offer in Compromise (Doubt as to Liability). This form is specifically for taxpayers who have a legitimate doubt about the amount of tax debt owed.

7. What are the payment options for an OIC?

   • Lump Sum Cash: Requires 20% of the total offer amount with the application, with the balance paid in five or fewer payments within five months after acceptance.
   • Periodic Payment: Requires the first payment with the application and the balance paid within 6 to 24 months, according to proposed offer terms. Monthly payments must be made while the IRS evaluates the offer.

   Note: There is a $205 application fee for an OIC, but individuals who meet Low-Income Certification guidelines are exempt from this fee and the initial payment requirements.

8. Can I appeal a decision on my OIC?

   If your OIC is rejected, you have the right to appeal the decision. However, certain actions, like failing to make required payments while your offer is being evaluated, cannot be appealed if they result in your offer being returned.

When individuals attempt to navigate the complexities of the IRS Form 656, the Offer in Compromise application, they often encounter challenges. To help guide those who are preparing to tackle this form, it's crucial to highlight some common mistakes to avoid:

1. Not filing all required tax returns prior to submission. The IRS demands that all necessary tax returns are filed before they will consider an Offer in Compromise.

2. Overlooking the need to stay current with estimated tax payments for the current year and, if applicable for business owners, making necessary federal tax deposits for the current quarter.

3. Including a tax debt in the offer that has not yet been billed. The IRS specifies that at least one tax debt must be formally billed to be considered for an offer.

4. Applying while in an open bankruptcy proceeding. As bankruptcy provides its own mechanisms for handling debts, those in active bankruptcy are not eligible for an Offer in Compromise.

5. Failure to resolve any open audit issues or outstanding innocent spouse claims, which need to be settled before submitting the offer.

6. Misunderstanding the eligibility regarding tax lien discharges. If a Notice of Federal Tax Lien has been filed, it may influence the outcome of the offer.

7. Attempting to include taxes that are not eligible for compromise, such as certain trust fund taxes without addressing the trust fund recovery penalty assessments.

8. Not correctly utilizing the Offer in Compromise Pre-Qualifier tool or misunderstanding its purpose in providing a preliminary offer amount for the IRS's consideration.

9. Neglecting to send the required $205 application fee or the initial payment with the offer, unless qualified for the Low-Income Certification exemption.

10. Choosing an inappropriate payment option or failing to adhere to the payment terms selected for the offer, which can result in the offer being returned.

Additionally, the complexities of the Offer in Compromise process also include recognizing that:

• Future tax refunds may be applied to your debt: For any tax year that ends before your offer is accepted, the IRS will keep any tax refunds.

• Penalties and interest continue to accrue: Until an offer is accepted, penalties and interest on the outstanding tax debt will not pause.

• Submission of an offer doesn't guarantee acceptance: The IRS evaluates various factors including ability to pay, income, expenses, and asset equity.

• Maintaining compliance post-acceptance is critical: After acceptance, it is imperative to stay current with all filing and payment obligations to avoid defaulting on the offer.

Understanding these potential pitfalls can be instrumental in preparing an Offer in Compromise that accurately reflects an individual's financial situation and increases the likelihood of acceptance by the IRS.

When navigating the complexities of resolving tax debts through an Offer in Compromise (OIC) with the IRS, understanding and preparing the required forms and documents is crucial. The IRS Form 656 is at the core of the OIC process, offering a pathway for qualified individuals and businesses to settle tax debts for less than the full amount owed. To support an OIC application, several additional forms and documents are commonly used to provide comprehensive financial details, ensure compliance, and meet the program's requirements. Here's a closer look at these essential forms and documents.

• Form 433-A (OIC) – Collection Information Statement for Wage Earners and Self-Employed Individuals: Provides the IRS with detailed information about the applicant's financial situation, including income, expenses, assets, and liabilities.
• Form 433-B (OIC) – Collection Information Statement for Businesses: Similar to Form 433-A but tailored for businesses, offering a snapshot of the business's financial health through details on assets, liabilities, income, and expenses.
• Form 656-L – Offer in Compromise (Doubt as to Liability): Used when the applicant believes they do not owe the tax debt or the amount assessed is incorrect. It provides a separate avenue within the OIC process for disputing the liability.
• Form 2848 – Power of Attorney and Declaration of Representative: Authorizes an individual, such as an attorney or accountant, to represent the taxpayer before the IRS, allowing them to make inquiries, provide information, and negotiate the OIC.
• Form 8821 – Tax Information Authorization: Grants a third party the permission to access and review the applicant's tax information, helpful for preparers assessing the situation and for family members or other parties assisting with the case.
• Form 4506-T – Request for Transcript of Tax Return: Allows taxpayers to request previous tax returns and income information, which may be necessary to substantiate financial claims made in the OIC application.
• IRS Publication 1 – Your Rights as a Taxpayer: Provides information on a taxpayer's rights throughout the IRS interaction, including the OIC process, essential for ensuring fair treatment and understanding the procedural safeguards in place.
• IRS Publication 594 – The IRS Collection Process: Offers insight into the collection process for taxpayers who owe taxes, including options for resolving tax debt and the role of the OIC within these procedures.
• IRS Notice CP 90 – Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing: Frequently involved in cases leading to an OIC, as it indicates the IRS's intention to levy assets, prompting many taxpayers to seek resolution through an OIC.

Successfully navigating the Offer in Compromise application requires careful attention to detail and thorough preparation of all relevant forms and documentation. The forms listed above are often crucial in establishing the taxpayer's financial situation, ensuring compliance with tax laws, and presenting a compelling case to the IRS for why an offer should be accepted. It's essential to understand the purpose and requirements of each document in the context of the OIC process to move forward with confidence towards resolving one's tax liabilities.

The Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, bears resemblance to the IRS 656 form in several aspects. Both documents require detailed financial information to assess the taxpayer's ability to pay their tax debt. While Form 656 initiates a request for an Offer in Compromise, Form 433-A provides the IRS with the necessary financial details to evaluate the taxpayer’s offer. This evaluation is crucial, as it determines the feasibility of the requested compromise by analyzing the taxpayer’s income, expenses, and asset equity.

Form 433-B (OIC), Collection Information Statement for Businesses, is another document similar to the IRS 656 form, targeted towards businesses seeking an Offer in Compromise. Like its counterpart for individuals, this form collects financial data but focuses on the business’s financial health, including assets, liabilities, and operational expenses. The completion of this form is pivotal for businesses to illustrate their incapability to fulfill their full tax liabilities, thereby necessitating the consideration for an Offer in Compromise encapsulated within Form 656.

Form 656-L, Offer in Compromise (Doubt as to Liability), shares a foundational purpose with Form 656; both aim to resolve tax liabilities under specific conditions. However, Form 656-L is distinct as it caters to taxpayers disputing the accuracy of the tax debt imposed on them, endeavoring for an adjustment on the grounds of doubt regarding the liability amount. While Form 656 addresses the ability to pay, Form 656-L centers on disputing the actual tax debt, reflecting different facets of resolving tax liabilities with the IRS.

IRS Form 1040, the U.S. Individual Income Tax Return, although primarily a tax filing document, indirectly relates to Form 656 as part of the prerequisite conditions. Before considering an Offer in Compromise through Form 656, taxpayers must ensure they’ve filed all required tax returns, including Form 1040. This compliance serves as a critical initial step in demonstrating the taxpayer’s commitment to rectifying their tax situation, thereby affecting the eligibility and assessment process of their offer.

The Application for Reduced User Fee for Installment Agreements similarly links with the concept of alleviating the taxpayer's financial burden, akin to Form 656. Though this application focuses on reducing the fee for establishing a payment plan, it aligns with the Offer in Compromise’s objective of making tax liabilities manageable for financially constrained taxpayers. Both documents facilitate the IRS’ engagement in solutions aimed at recovery of debts in consideration of the taxpayer's ability to fulfill their obligations.

IRS Form 2848, Power of Attorney and Declaration of Representative, complements the aim of Form 656, albeit through a different mechanism. Taxpayers looking to submit an Offer in Compromise may utilize Form 2848 to authorize a tax professional to act on their behalf in negotiations and communications with the IRS. This legal representation can be pivotal in effectively presenting and managing an Offer in Compromise, demonstrating the forms’ collaborative roles in addressing tax liabilities.

Form 8821, Tax Information Authorization, while not directly part of the Offer in Compromise process, supports it by allowing designated individuals to access a taxpayer’s information, which can be instrumental in preparing a comprehensive and accurate Form 656. By enabling a tax professional to review tax histories and liabilities, Form 8821 assists in gathering the necessary backdrop and details for a viable Offer in Compromise.

The Collection Information Statement for Wage Earners and Self-Employed Individuals, without a specific form number akin to Form 433-A (OIC), serves a parallel purpose. It underscores the necessity for taxpayers to comprehensively disclose their financial landscape. This detailed disclosure is essential for the IRS to ascertain the taxpayer’s capability to settle their tax debt, echoing the informational requirements posed by Form 656 in the Offer in Compromise process.

Lastly, the Department of Justice’s role in tax liability settlements, though not encapsulated in a singular form, intersects with the conditions outlined in Form 656 regarding the ineligibility for an Offer in Compromise during ongoing Department of Justice proceedings. This contextual similarity underlines the broader regulatory and procedural framework within which tax liabilities and compromises are navigated, demarcating the boundaries and possibilities for tax debt resolution efforts.

When engaging in the process of filling out the IRS Form 656, Offer in Compromise, there are several essential practices to adopt and pitfalls to avoid to enhance your chances of reaching a favorable outcome. Here is a guide to help navigate this form:

• Do:
• Ensure you have filed all legally required tax returns before submitting Form 656. An offer will not be considered unless all necessary tax documentation is current and filed.
• Use the Offer in Compromise Pre-Qualifier tool available on the IRS website to assess eligibility before you begin the paperwork. This tool provides a preliminary understanding of your eligibility and potential offer amount.
• Confirm that you have received a bill for at least one tax debt included on your offer. The IRS needs this to proceed with your form.
• Include all required estimated tax payments for the current year and, if applicable, make all required federal tax deposits for the current quarter if you are a business owner with employees.
• Gather detailed financial information about your assets, income, expenses, and future earning potential as the application requires comprehensive disclosure.
• Don't:
• Submit Form 656 if you or your business is in an open bankruptcy proceeding. Such situations are handled within the bankruptcy process, not through an offer in compromise.
• Ignore open audit or outstanding innocent spouse claims. Be sure to resolve these issues before submitting your offer.
• File without considering your full ability to pay the debt through installment agreements or asset equity. The IRS seeks to compromise based on what you can legitimately afford to pay.
• Forget about your future tax refunds. Be aware that the IRS will apply any refunds you are due for tax periods through the calendar year in which they accept the offer to your tax debt. This will not be considered a payment toward your offer amount.
• Overlook the necessity of staying current with all tax filing and payment obligations during the consideration of your offer and for five years after acceptance. Failure to comply can result in the return or nullification of the accepted offer.

Adhering to these guidelines will streamline the process, potentially leading to a successful offer in compromise. It helps to address your tax liabilities thoughtfully and realistically, providing a pathway to financial recovery without exacerbating your situation.

Understanding the IRS Form 656, an Offer in Compromise (OIC), can often lead to misconceptions. Here are four common misunderstandings and the truths behind them:

• Misconception #1: Submitting Form 656 guarantees the IRS will accept your offer.

  Reality: Filing Form 656 starts a review process but does not guarantee acceptance. The IRS evaluates your ability to pay based on your financial situation, considering factors like income, expenses, and asset equity. Your offer must reflect your true ability to pay for it to be accepted.

• Misconception #2: You can’t make an offer if you haven’t filed all your tax returns.

  Reality: Eligibility for an OIC requires you to have filed all legally required tax returns. The IRS will return your offer without consideration if all required returns are not filed, emphasizing the importance of being up-to-date with your tax filings before submitting Form 656.

• Misconception #3: An OIC stops all collection activities and penalties.

  Reality: While submitting an OIC may temporarily suspend certain collection efforts, it does not stop penalties and interest from accruing. Additionally, the IRS can still levy your assets up until your offer is accepted. Keeping current with other tax obligations during the review process is crucial.

• Misconception #4: Future tax refunds will not be affected after an OIC is accepted.

  Reality: The IRS will apply any tax refunds due to you for the calendar year in which your offer is accepted towards your tax debt. This includes any tax refund you would have received had your offer not been accepted, underscoring the need to understand the implications fully on future tax refunds.

Clearing up these misconceptions can help individuals better prepare for and understand the process of submitting an Offer in Compromise through Form 656, ultimately aiding in making informed decisions about tackling tax debt.

The IRS Form 656, known as the Offer in Compromise (OIC) form, is a critical document for taxpayers seeking to resolve their tax debts for less than the full amount owed. Filling out and submitting this form initiates a detailed review process by the IRS. Here are five key takeaways about using the IRS Form 656:

1. Eligibility requirements must be met before applying: Before considering an offer in compromise (OIC), taxpayers must ensure they have filed all required tax returns, received a bill for at least one tax debt included in the offer, made all required estimated tax payments for the current year, and if applicable, made all required federal tax deposits for the current quarter if they are a business owner with employees.
2. Determining the offer amount is crucial: Taxpayers should use the OIC Pre-Qualifier tool available on the IRS website to help determine a preliminary offer amount. This tool assists in gathering necessary information and provides instant feedback based on the provided details. However, the initial offer amount suggested by the tool is not a guarantee of acceptance by the IRS.
3. Submission of the form does not halt accrual of penalties and interest: While the IRS reviews the OIC, penalties and interest will continue to accrue on the outstanding tax debt. It's important for taxpayers to understand that submitting a Form 656 does not freeze the accrual of additional costs on their debt.
4. Future tax refunds may be applied to your tax debt: If the IRS accepts a taxpayer's offer, any tax refund due to the taxpayer for the tax periods through the calendar year of acceptance will be applied to their tax debt. This means that taxpayers should not expect to receive tax refunds while their offer is being considered and possibly after acceptance.
5. Payment options are available but come with requirements: Taxpayers can choose between a lump-sum cash payment or a periodic payment option when submitting their OIC. The lump-sum option requires 20% of the total offer amount upfront, with the balance paid within five months. The periodic payment option requires the first payment with the offer and the remaining balance paid within 6 to 24 months. For either payment option, failure to make the agreed payments can result in the return of the offer without appeal.

Filling out and submitting the IRS Form 656 is a process that requires thoroughness and accuracy. Taxpayers must provide comprehensive details about their financial situation, adhere to the eligibility criteria, and remain committed to the payment plan proposed in their offer. Understanding these key aspects can aid in preparing a credible and feasible Offer in Compromise application.