When you receive a big tax bill from IRS, or have a large tax debt, you may be dismayed with paying off the amount all at once. As a matter of fact, IRS has an option for people who cannot afford to pay off their total tax debts. The IRS call this program the Offer in Compromise Program. The form 656 serves this purpose.
The nature of this form is an agreement between IRS and taxpayer to settle a tax debt amount that is less than what the taxpayer owed through an offer by the taxpayer, and then a negotiated settlement. The ultimate goal of this form is to settle an agreement that fits both parties’ interests. However, the IRS does not guarantee the approval of this application. However, there are little downsides of trying this process.
There are some pre-qualifications issues related to using this debt reduction tecnique. To be eligible for this process, you must have filed all your income tax returns that are legally required, and make all required estimated tax payments for the current year. Along with these three requirements, you cannot apply for offer in compromise if you or your business is currently in an active bankruptcy proceeding. You should go to IRS pre-qualifier test before you start the process. The link to the test is https://irs.treasury.gov/oic_pre_qualifier/.
The whole offer package typically includes four components. Before you get started, you should gather information for this application since it requires a lot of detailed information and you have to be careful in how you answer the questions. The first component is Form 433-A (OIC) or Form 433-B (OIC). Form 433-A is designed for individual, sole proprietor, or disregarded single member LLC’s. On the other hand, Form 433-B is used if the business is a corporation, partnership, LLC classified as corporation, single member LLC taxed as a corporation or multiple-owner/member LLC is applying for relief. Sometimes both forms are needed with one submission. You need to provide detailed information about your financial situation to finish this form. Information is required for assets, liabilities, income and expenses. For example, for assets section, you may need bank statements and property appraisal’s. For liabilities, you may need credit report or loan agreements. You also will get a chance to explain any special financial situations in the form.
The next three components come next in the the Form 656, offer in compromise. In this form, you should provide your basic information like name, your SSN, address and EIN number if applicable. Then you need to specify what type of tax issue you have and which year(s) apply. Then you will calculate the offer amount. Two options will apply. You can use the lump sum method, which means an 20% initial payment and pay off the debt within 5 or less payments within 5 months or less. You can also pick periodic method which allows you pay off your debt within 6 to 24 months. I tend to pick the payment within 5 months variety since the settlement amount will be lower. The third component is the initial payment mentioned before. You can test your income on Form 656. If your income is lower than a certain threshold, the initial payment will be waived. Same thing happens with our last component, the $186 application fee.
To sum this up, when you have trouble paying all your tax debt, first go to website and finish the pre-qualifier test to get a feel for if this program is possible. Then you can finish Form 433-A (OIC) and/or Form 433-B. Then you can prepare Form 656. The last step will be submitting application fee and first initial payment if applicable.