If you’re trying to figure out how to deal with your unpaid taxes, you’ve probably come across the IRS offer in compromise or OIC. This special program allows eligible taxpayers to settle their tax debt with the IRS for an amount that’s less than what they owe.
It might sound too good to be true, but an offer in compromise can be a great option if you can’t pay back the full amount of your back taxes or if doing so would create an undue financial hardship on you.
To apply for an offer in compromise, you’ll need to complete two primary forms (or a variation of these forms). These are Form 656 and Form 433. In this article, we’ll focus on Form 656, including how to complete it and when you might want to seek assistance from a tax professional. But before we get to those topics, let’s take a closer look at how an OIC works.
Reasons to Request an Offer in Compromise With the IRS
The IRS offers the offer in compromise because they understand that they “can’t get blood from a stone.” In other words, they know that there are situations where there’s no practical or reasonable way they can expect a taxpayer to pay their full tax debt, so the IRS might as well agree to accept a partial payment instead. Three main reasons form the basis for the IRS accepting an offer in compromise request.
- Doubt as to collectibility (DATC), which means you don’t have the income or assets to pay off your entire tax debt.
- Doubt as to liability (DATL), which means you don’t believe you’re legally responsible for the tax debt or you think the amount of the tax debt is incorrect.
- Effective tax administration applies when you have the financial means to pay off your entire tax debt, but the IRS asking you to do so would be unfair, inequitable, or create significant economic hardship for you.
An OIC request requires you to complete the following forms:
- Form 656, Offer in Compromise, or
- Form 656-L, Offer in Compromise (Doubt as to Liability).
In addition to either of these forms, you’ll also need to complete either
- Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or
- Form 433-B (OIC), Collection Information Statement for Businesses.
An Overview of IRS Form 656
Forms 656 and 656-L are the primary forms for the offer in compromise application. On these forms, you’ll provide your basic information about you, your tax debt, the reason you believe the IRS should accept your offer in compromise, and the financial terms of your offer.
You’ll use Form 656 if you’re requesting an offer in compromise based on doubt as to collectibility or effective tax administration. You’ll use Form 656-L if you’re requesting an offer in compromise based on doubt as to liability. If you look up either of these forms online, you might come across IRS Form 656-B. This is an offer in compromise booklet that provides detailed information about the OIC process and includes copies of forms 656, 433-A (OIC), and 433-B (OIC).
If you have a genuine dispute and supporting documentation that shows you do not owe a particular tax debt or that the tax debt amount is incorrect, it might be best to pursue an offer in compromise doubt as to liability argument first with the IRS. You want to ensure that your tax debt owed is correct and accurate. However, if you are in a scenario where the tax debt amount is incorrect but you still owe a tax even if the IRS adjusted the liability to the correct amount, you would still be obligated to pay that corrected amount. If you don’t have the financial ability to pay that corrected tax liability amount, it might be better to pursue an offer in compromise doubt as to collectibility instead as long as you qualify financially. A tax attorney would be able to run through the different offer in compromise scenarios and determine which one would be best to pursue.
Completing IRS Form 656
Section One of Form 656 requires you to provide information about yourself if you are filing an offer in compromise as an individual. In this section, you will input your name, tax ID number (SSN or ITIN), and address. If you are filing an offer in compromise with your spouse, you will also fill out your spouse’s information within Section One. You’ll also need to input the tax debt you want the IRS to consider with the offer in compromise by indicating the tax form(s) and year(s) that have balances.
There’s also a section where you can request Low-Income Certification. If you’re certified as a low-income taxpayer, you don’t have to pay the $205 Form 656 application fee or make the initial OIC payments when sending the IRS your completed Form 656.
If you are filing an offer in compromise for business tax debt, skip Section One and fill out Section Two instead. Section Two will ask for your business information, such as name, address, and Employer Identification Number (EIN). You would also input the business tax forms and tax periods at issue with balances you want to include in the offer in compromise.
Choosing the Reason for Your Settlement
Sections Three and Four serve as the heart of Form 656. In Section Three, you’ll choose the basis for your offer in compromise, such as:
- Doubt as to collectibility
If you do not have enough assets and income to pay your full tax balance, you will check the “Doubt as to Collectibility” box. If special facts (besides insufficient income or property) prevent you from fully paying your tax liability, you must provide a detailed written explanation.
- Effective tax administration – economic hardship (only individuals)
You’ll check the Effective Tax Administration – Economic Hardship box to see if you owe the tax liability and have the money to pay it in full. However, due to special circumstances, requiring full payment would create an economic hardship for you. In addition to checking this box, you’ll need to provide a detailed written explanation identifying these special circumstances.
- Effective tax administration – public policy or equity
You’ll check the Effective Tax Administration – Public Policy or Equity box if you concede that you owe the tax liability and have the assets and income to pay the liability in full. However, you would check this box if there are exceptional circumstances that occurred that show collection of the full liabilitywould be inequitable (unfair). In addition to checking this box, you’ll need to provide a detailed written explanation discussing these circumstances.
Making an Offer
Section Four is where you will provide the amount you are offering to settle your tax debt. You must choose a Lump Sum or a Periodic Payment option in how you will pay your offer amount. If you choose the Lump Sum option, you’ll provide a check for 20% of the amount of your offer in compromise (this 20% payment requirement is waived if you receive Low-Income Certification) along with Form 656. You’ll then pay the remaining 80% of your offer within the next five months after the acceptance date of the offer in compromise.
If you choose the Periodic Payment option, you have six to 24 months to pay the entirety of your offer with monthly payments. When you submit Form 656, you must include the first month’s payment (this initial monthly payment requirement is waived if you receive Low-Income Certification).
If using the Periodic Payment option, keep in mind that you must continue making monthly payments while the IRS considers your offer in compromise. Missing a payment will result in the IRS returning your OIC application, and you’ll have no right to appeal. However, if you have Low-Income Certification, you don’t need to send any payment with Form 656 and will only make the first monthly payment within 30 days of the IRS accepting your OIC.
Explaining the Source of Your Funds
Sections Five and Six from Form 656 are where you give the details about how you intend to pay for your offer, where you’ll get the money to make those payments, and what tax year(s) or tax debt(s) you want your OIC payments to go to.
Under Section Six, there is a section on Filing Requirements where you must check the box to certify that you have filed all required tax returns and have included a copy of any tax returns filed within 12 weeks of the Offer submission. If applicable, you must also check the box and indicate any years you were not required to file a tax return. There is also a Tax Payment Requirements Section where applicable boxes will need to be checked as well. If filing individually, you will either need to check the box to certify you have made all required estimated tax payments for the current tax year or check the box that you were not required to make any estimated taxes for the current tax year. If submitting an offer in compromise for a business, you will either need to check the box that you have made all required federal tax deposits for the current quarter and proceeding two quarters or check the box where you were not required to make any federal tax deposits for those tax periods.
Section Seven of Form 656 can be considered “the fine print” where the terms of the offer in compromise are laid out. You don’t need to do anything here besides read it carefully and confirm you can abide by the terms.
Sections Eight and Nine are for you and your tax professional who helped you (if applicable) to sign Form 656.
Remember, once you complete Form 656, you’ll also need to complete either a 433-A (OIC) or 433-B (OIC) if you are pursuing the offer in compromise doubt regarding the collectibility argument. These forms are where the bulk of the information concerning your financial situation will go. You’ll also need to include a check for the $205 offer in the compromise application fee unless you obtained a waiver due to Low-Income Certification.
Submitting Form 656 to the IRS
When you’ve completed the Form 656 and the Form 433-A or 433-B (if applicable), make at least one extra copy of these forms (and any accompanying financial documents and written statements) for your records. Then, mail your OIC application package with all forms and supporting documents to the correct IRS facility. You can find the correct address in the Form 656-B Booklet, as the mailing address will depend on where you live.
How to Submit the Best OIC Application Possible
There’s no way to be 100% sure the IRS will accept your offer in compromise, but there are things you can do to increase your chances. First, you want to have the right supporting documents. The exact list of documents you need depends on your specific situation, but commonly required support documents include:
- Tax returns and other tax documents relating to the tax years included in your offer in compromise.
- Evidence of past income includes 1099s, bank statements showing income-related deposits, and pay stubs.
- Financial statements include monthly bank statements, quarterly retirement or investment statements, and credit card statements.
- Receipts, bills, and any other documents reflecting your living expenses. This can include medical bills, insurance bills, grocery receipts, rent invoices, etc.
Next, provide as detailed information as possible when explaining why you believe you’re eligible for an OIC.
If you’ve been in contact with an IRS employee concerning your unpaid taxes, giving them a heads-up about your offer in compromise application is a good idea. This doesn’t necessarily increase your chances of approval, but the IRS representative you’ve been working with will appreciate you letting them know and may be able to help you confirm the IRS received your application.
Finally, when deciding on how much money to offer, you need to provide an amount that’s at least equal to (if not greater than) the minimum offer amount calculated in Section Eight of the Form 433-A (OIC) or Section Five of the Form 433-B (OIC).
Getting Help With Your OIC Request
As you can see, sending the IRS an offer in compromise is an involved process, and understandably, you don’t want to go through all that time and work just for the IRS to reject your offer. Unfortunately, it’s difficult to determine your chances of success without first talking to a tax professional. Even though your situation is unique, chances are good that a tax professional has dealt with a comparable situation and can give you at least a ballpark idea of what to expect in terms of your chances of success.
It’s also helpful to consult with a tax professional for the offer in compromise application process in itself. There’s a lot that needs to be provided, and one mistake, misunderstanding, or omission can result in delays or even a rejection. Even if you can reapply, the time lost could cost you significant money in terms of more interest, penalties, and OIC payments that you made while the IRS was considering your request. Yes, the IRS will apply the OIC payments to your tax debt, but if you knew your OIC request would be returned or rejected, you might have taken a different approach to resolving your tax debt, such as using those payments toward an installment agreement.
Hiring a professional to help you with the offer in compromise application can increase your chances of success by reducing the possibilities of a mistake, misunderstanding, or omission. The tax professional will also likely be better skilled at negotiating with the IRS if you have a close case.
OIC FAQs
What happens after I mail my OIC application to the IRS?
The IRS should contact you to confirm receipt of the offer in compromise, provide you with the contact information of the agent reviewing your application, and indicate if they need additional information. If you receive a request for more information, respond to them as quickly as possible to avoid delays in processing your OIC application. If you wait too long to respond, the IRS may return your offer with no appeal rights.
How long does the OIC process take?
The length of time varies, but expect it to take at least six months from the date the IRS receives your application packet to the IRS making a decision. At the very least, the IRS will usually decide within 24 months of receiving your request, as not doing so will mean your offer is deemed to be automatically accepted. An IRS agent from the Offer in Compromise Unit will likely be assigned to your case. If assigned, they will contact you to discuss the documentation submitted and attempt to come to a resolution with you.
What happens if the IRS returns my OIC application?
If the IRS returns your application, you can ask for reconsideration, but only if you believe the IRS made a mistake in returning your application. If the IRS returns your application because you’re in bankruptcy, you haven’t complied with the terms of the OIC (including making payments after the offer is submitted), your OIC request was only made to delay the IRS collection process, the IRS believes tax collection efforts are in jeopardy, the original tax assessment has been abated, or there are other pending IRS investigations, then reconsideration of an OIC return might not be available.
What if the IRS rejects my offer in compromise?
If the IRS rejects your application, you may file an appeal within 30 days.
What about joint marital debts?
If you and your spouse share the same debt subject to an OIC request, you’ll complete one copy of Form 656 for both of you. However, if you have separate tax debts and want an offer in compromise for each of the debts, then you and your spouse will submit your own Form 656.
Is there a quick or easy way to determine if the IRS will likely accept my offer in compromise?
No, but the IRS has a special OIC Pre-Qualifier tool that may help determine your eligibility for an OIC. It also helps to consult with a tax pro about your situation and whether an OIC is your best option for dealing with unpaid taxes.
Thinking About Submitting an Offer in Compromise to the IRS?
It’s possible to apply for an offer in compromise by yourself, but it’s not an easy process. It may also take a significant amount of time and financial investment to make the request. The last thing you want to do is get your offer rejected or returned because you were unfamiliar with the process that caused a preventable mistake.
Either way, the tax pros from Wiggam Law can help. We have extensive experience helping taxpayers like you determine if it’s worth submitting an offer in compromise application to the IRS and, if so, the best way to go about doing it. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting with us today.