An Offer in Compromise (OIC) is a tax settlement offer provided by the IRS to taxpayers, both individuals and businesses, who are unable to pay their tax dues in full. There are certain strict criteria that spell out who will be eligible to file for the OIC and if you fulfill these criteria, you will need to fill out Form 656 and submit a whole host of documents to be considered for the offer.
Preparing Form 656
You need to fill out a Form 656 to file for an OIC in two circumstances. In the Doubt as to Collectibility situation, there exists a reasonable amount of doubt over your ability to pay the full amount of your claims within the specified period. In the Effective Tax Administration case, your contention for a tax settlement is that paying the full amount of the dues will create economic hardship for you.
Now that you know the circumstances in which you will need to prepare Form 656, here’s what you should remember when completing the form:
- You need to include the relevant information in every field on the Form 656.
- You need to include the names of both the persons in case of a joint offer for joint liabilities. If you owe a liability jointly and both you and your partner are submitting an offer, then do so on Form 656, just one form.Now, you may owe a liability, such as employment taxes for yourself and hold other liabilities, such as income taxes, with another person. If, only you are submitting this form, then you need to list all liabilities on one of Form 656. In case both of you want to submit this application, then you have to include all tax liabilities on your Form 656 and the other person must show only the joint tax liability on their Form 656.
- All persons submitting the offer should enter their social security numbers.
- You need to show the employer identification numbers of all businesses, except corporate concerns, that you own, either wholly or partly.
- If your claim to an OIC is based on a Doubt as to Collectibility, you need to also furnish a completed Form 433-A if you are an individual taxpayer and Form 433-B if you are a business taxpayer.
- If your claim to an OIC is based on Effective Tax Administration, then apart from submitting a Form 433-A or 433-B, you will also need to fill out the details in the “Explanation of Circumstances” field. You may include additional bits of relevant information in separate sheets along with your social security and employer identification numbers.
- While filling out the total amount of your offer, you cannot include a sum that the IRS owes to you or any amount that you may have already paid in taxes.
- All persons submitting the offer should sign the form and provide a date. They must also include the names and titles of authorized corporate officers, trustees, Powers of Attorney, and executors wherever requested.
- Ensure that you mention the name and if possible, the address of the person who may have prepared the OIC on your behalf.
- You might want the IRS to get in touch with a family member, a friend, or any other acquaintance to discuss your case and understand your situation better. In that case, you need to tick the “Yes” box in the “Third Party Designee” field. Additionally, if you want your attorney, CPA, or an enrolled agent to represent your case, you will need to complete the Form 2848 and submit it with your offer.
Now that you know how to complete the long and lengthy Form 656, take stock of the documents that you will need to submit alongside that form. The list is as follows:
- Tax return statements for at least the previous five years
- Complete tax documents that contain the records for all the years due back taxes
- Copies of paystubs dating back to the past three months
- Copies of bank and credit card statements from the past three months
- Copies of mortgage, loan, and brokerage statements
- 401k statement and information related to other retirement account funds
- Detailed documents pertaining to all investments
- A summary of the household expenses incurred for child care, transportation, health care, housing, and all other forms of personal expenses in the past three months
Make Copies; Remain Patient
The above pieces of supporting documentation are crucial to the chances of your offer being accepted by the IRS. And after you have gathered all the above-mentioned documents for submission, ensure that you make copies of each one for your personal records. Apart from these documents, you may also submit documents that you think will corroborate your claim for this genuine offer.
Attention to Detail
Filing for the OIC is a complicated process. Ensure that you spend ample time over the Form 656 and submit the entire set of supporting documents to increase your chances of a favorable outcome.