Completing Form 656, Offer in Compromise
TAMARA: Hi, I'm Tamara, and I work for the IRS.
In this video, we'll show you how to complete an Offer in Compromise application, Form 656, and point out common mistakes that can cause your offer to be returned to you.
We'll also reference Form 656-B, the Offer in Compromise Booklet.
The booklet also contains two other important forms -- Forms 433-A (OIC): Collection Information Statement for Wage Earners and Self-Employed Individuals... and Form 433-B (OIC): Collection Information Statement for Businesses.
These forms lead you through a series of steps to help calculate an appropriate offer based on your assets, income, expenses, and future earning potential.
By completing Form 433-A and, if applicable, Form 433-B first, you will be able to determine what is a potentially acceptable offer amount.
After you've completed all the financial-information statements, you'll be ready to complete the Offer in Compromise application, Form 656.
Form 656 is available online at www.IRS.gov and in the Form 656-B Offer in Compromise Booklet.
You need to determine how many offer applications are required.
A separate application is necessary for each tax entity, such as individual or corporate tax liabilities.
Also, save yourself some time by avoiding this very common error -- If you or your business is currently in a bankruptcy proceeding, you are not eligible to apply for an offer.
Any resolution of your outstanding tax debts generally must take place within the context of your bankruptcy proceeding.
Now let's go through the form and see where other common errors are made.
Section 1 -- Your Contact Information.
This is mostly self-explanatory.
If you owe taxes jointly with your spouse, enter your spouse's first name, middle initial, and last name on the line.
If you do not owe taxes jointly with your spouse or do not have a spouse, enter "N/A."
Fill in your identifying numbers in the next area.
The primary Social Security Number is the number you use when filing your income tax return.
The secondary Social Security Number generally belongs to your spouse.
Leave the secondary line blank if you do not owe joint taxes with your spouse.
If you owe business taxes, provide the Employer Identification Number, E.I.N., in this designated area.
If you do not owe business taxes but do have an E.I.N., provide that number in the area titled "E.I.N. not included in offer."
Section 2 -- Tax Periods.
In this section, identify the types of tax and periods or years you owe.
Improperly identifying the type of tax owed is a common mistake.
Form 1040 Tax-Year(s) -- this is for individual or personal income-tax liabilities.
List each tax-year owed -- for example, 2006, 2007, and 2008.
Form 1120 Income Tax-Year(s) -- This is for corporate taxes owed.
List corporate tax-years owed, and remember -- do not include corporate liabilities with an individual offer application.
They should be included with the separate offer.
The next three types of tax debt covered are for business owners with employees.
Form 941, employee withholding taxes, are filed quarterly.
List each period owed -- for example, 9/30/2009, 12/31/2009, and 3/31/2010.
Form 940, unemployment taxes, are filed annually.
Trust Fund Recovery Penalty, TFRP tax, is for those who are individually liable for withheld employment taxes.
Again, TFRP tax is listed quarterly -- for example, 6/30/2008 and 9/30/2008.
Other federal tax or taxes -- identify any taxes and periods not listed above.
Examples include Form 2290, Highway Use Tax... Form 706, Estate tax... or Civil Penalties.
Section 3 -- Reason for Offer.
Check the box "Doubt as to Collectibility" if you do not have enough money to fully pay the amount you owe.
If you have the ability to fully satisfy your liability but, because of exceptional circumstances, full payment would either cause an economic hardship or be unfair and inequitable, you should check the box marked "Exceptional Circumstances."
You will need to describe your situation in Section 3 at the top of page 2 and attach appropriate documents to the offer to substantiate your circumstances.
Section 4 -- Low Income Certification.
The Low Income Certification is for individual tax liabilities only.
Businesses do not qualify for Low Income Certification.
Review the chart and determine if you qualify for Low Income Certification based on your family unit size and total monthly household income.
If you meet the Low Income Certification requirement, you are not required to submit the application fee or any payments while we consider your offer.
Section 5 -- Payment Terms.
Enter the amount of your offer.
This should be the amount you calculated when you completed the financial-information forms unless exceptional circumstances apply.
IF you have exceptional circumstances, enter the amount that you are offering.
Now select the payment option that is best for you.
Payment Option 1 -- Check this box if you will pay your offer in five or fewer payments.
This option requires 20% of the total offer amount to be paid with the offer application.
Next, enter 20% of the offer amount, the remaining balance, and the dates after acceptance, when the offer will be paid.
For example, if you are offering $5,000 to be paid within 30 days of acceptance, enter $1,000 as the 20% amount and $4,000 as the balance.
On the amount of the payment line 1, enter $4,000 and "30 days from the date of acceptance" on the "date" line.
If you qualify for Low Income Certification, enter "0" on the 20% line and enter the full amount of your offer on the balance-due line.
Then enter the amount of your payment or payments and the dates the remaining payment will be made after acceptance of the offer.
Payment Option 2 -- Check this option if you will pay your offer in more than five months and in monthly installments.
You are required to make the first payment with your application unless you meet the requirements for Low Income Certification.
It's important to note that if you select this option, you must continue to make these monthly payments while the offer is under consideration unless you meet the requirements for Low Income Certification.
Failure to do so will cause your offer to be returned, so avoid this common error.
Section 6 -- Designation of Down Payment and Deposit.
You have an option to designate your initial payment to a particular tax period here.
Non-designated payments are applied to periods determined to be in the best interest of the federal government.
Any payment above the required initial amount may be treated as a deposit.
If you are making an additional payment, indicate this by checking the box and filling in the deposit amount.
Section 7 -- Source of Funds.
Tell us how you will pay the amount offered here.
The offer payment and offer application fee of $150 should be two separate checks.
Avoid this common error -- do not send cash, and do not include the two checks with any other tax payments, as this may delay processing of your application.
If you qualify for the Low Income Certification, you do not have to pay the $150 application fee.
Section 8 -- Offer Terms.
Be sure to review the terms and conditions to which you're agreeing.
Section 9 -- Signatures.
Forgetting to sign the forms is another common error.
Each person submitting the offer must sign and date the application form.
For a joint offer, both parties must sign and date in this section.
For an offer from a corporation, place the name of the corporation on the first signature line and then the name, title, and signature of the authorized officer on the second signature line.
Section 10 -- Paid Preparer Use Only.
This section is to be completed by the paid preparer and accompanied with a valid, signed Form 2848, Power of Attorney and Declaration of Representative... or Form 8821, Tax Information Authorization, if one is not already on file.
Section 11 -- Third Party Designee.
If you would like the IRS to discuss your offer with another person, provide the designee's name and telephone number in this block.
After you've completed the application form, look over the application checklist on page 23 of Form 656-B to ensure you're including all of the necessary information with your application.
Don't forget to sign the Offer in Compromise application form, as well as the financial statements you are submitting.
Information you send supporting your financial statements should be copies, not originals, so don't make the error of sending your original forms.
Mail your application package to the appropriate IRS facility.
Mail the Forms 656, 433-A (OIC) and/or 433-B (OIC), and other related financial documents to the appropriate IRS processing office for your state.
As mailing addresses are subject to change over time, we suggest you check the current Form 656-B on www.IRS.gov or call 1-800-829-1040 to get the most current mailing addresses.
For more information, please go to www.IRS.gov and type "How to file an Offer in Compromise" in the search field.