What Is IRS Form 656

How Form 656 Works

The debt burden can add up quickly if you fall behind with tax payments. Missed tax payments accrue penalties and interest, making it that much harder to pay off the debt. Form 656 provides a way to reach an agreement with the IRS that you'll pay less than what you owe.

Form 656, the "offer in compromise" (OIC), gives the IRS an overview of your financial situation so it can review your debt and your ability to pay. It will determine whether the offer suits both parties' best interests, both the agency's and your own.

Example of Form 656

It's been a long, tough year economically. You have a side gig in addition to your regular employment, and you earned a fair bit of money from that endeavor early in the year. Then work dried up and you weren't able to make your estimated quarterly tax payments throughout the year.

You complete your tax return in April to realize that you owe the IRS $15,000. You simply do not have that cash, and your credit has taken a hit, too, so your ability to take out a loan is compromised. Moreover, you probably couldn't repay the loan if you managed to take one out. Nor do you feel comfortable about being able to make all your payments under an IRS installment agreement.

You file Form 656 with the IRS, asking for an offer in compromise. You provide all the grim details of your financial situation. You propose paying $1,000 instead of $15,000 because that's all your limited income can support. You're literally asking the IRS to compromise on the amount of tax you currently owe.

Who Uses Form 656?

You can request an OIC for any one of three reasons:

• There's doubt as to the collectability of your tax debt.
• There's doubt about your liability for the debt.
• It's "effective tax administration" because of an exceptional circumstance.

You'll have to prove your case.

Doubt As to Collectability

Doubt as to collectability means that a taxpayer isn't ever likely to be able to pay the full amount of tax debt owed to the IRS. It doesn't mean that you doubt that you owe the outstanding balance. You accept that you owe a debt.

You're telling the IRS that it can pursue you for the debt all it wants, but it won't be able to get all the money because you simply don't have it. You don't have any assets you can liquidate or refinance to raise the money. You're not likely to be approved for an unsecured loan.

Alternatives to an OIC based on this reason would be the arrangement of a long-term installment agreement or a partial-pay installment agreement with the IRS.

Doubt As to Liability

Doubt as to liability means that you don't think you're responsible for the outstanding balance of the tax debt. You must submit a statement explaining why you believe this to be so.

It might be easier, faster, and less costly to find a way to resolve the underlying tax debt than to seek an OIC based on this reason. Alternatives include filing an amended tax return to correct any perceived errors, requesting innocent spouse or injured spouse relief, seeking penalty abatement, or asking for an audit reconsideration.

Effective Tax Administration

You're claiming that exceptional circumstances would pose a serious economic hardship to you if you were to pay the tax in this case. It would be unfair and inequitable to collect the entire balance from you. You don't doubt that you're responsible for the outstanding tax debt or that the IRS could probably collect the full amount due if it were to try.

Significant economic hardship cases would include serious health problems. Enrolled agent David Bauman, an offer-in-compromise specialist with JK Harris, advises:

"In submitting an offer based on effective tax administration, the taxpayer needs to provide an extensive narrative of the special and extraordinary circumstances, along with the rest of the offer-in-compromise documentation. Extraordinary circumstances would mean some sort of life-or-death situation, such as a serious medical condition."

Alternatives include seeking a long-term installment agreement, requesting a partial-pay installment agreement, or seeking penalty abatement based on reasonable cause.

Where To Get Form 656

You can download the full Form 656 booklet from the IRS website and fill it out yourself, but it's usually best to work with a tax professional to complete this and any other related tax forms. It's not easy to get your OIC right, so enlisting professional help will give you a better chance of succeeding.

How To Fill Out and Read Form 656

The Form 656 booklet contains detailed instructions along with additional forms that you might need to include with your OIC. You should be ready with detailed information about your personal and business finances, including employment, wages, assets, and liabilities. Be sure you're prepared with all these details, along with an explanation for why you're making the offer.

Payment Terms

You must also indicate the payment terms for your offer. Payments begin from the date the IRS accepts and approves your OIC. You can choose one of two options:

• Lump sum payment: This includes 20% of your total offer upfront, plus a proposed payment plan over the next one to five months.
• Periodic payment: You propose to pay off your offered amount over a period of six to 24 months.

You should plan on paying your proposed monthly amounts until you hear whether the IRS has accepted or rejected your offer unless you meet the low-income certification guidelines.

Can Form 656 Be E-Filed?

You can't e-file Form 656. You must mail your offer in compromise to the appropriate IRS office with all the required paperwork. But you can set up your payments electronically.

Where To Mail Form 656

Mail your completed Form 656 to the following address if you live in Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, or Washington:

Memphis IRS Center COIC Unit
P.O. Box 30803, AMC
Memphis, TN 38130-0803

Residents of all other states or a foreign country should send their form to:

Brookhaven IRS Center COIC Unit
P.O. Box 9007
Holtsville, NY 11742-9007

How To File Form 656

The Form 656 booklet includes detailed instructions on how to file your offer in compromise. Make sure you've filled out all required sections and included any necessary fees and initial payments. Send your forms to the correct address for your state.

What Are the Odds of Acceptance?

The IRS will generally accept an OIC if all the paperwork is in order and it believes that the offer is the most money it's likely to be able to collect from you. It will probably reject your application if it believes it can collect more from you than what you've offered.

You have 30 days to appeal if the IRS rejects your offer. Use Form 13711 to explain why you disagree with the decision.

If Your Offer Is Accepted

The offer in compromise is a contract between you and the IRS, so read IRS Form 656 very carefully before you sign and submit it. The OIC contract sets forth your responsibilities. It explains that any refunds due for a specific tax year will be applied toward your debt until it's paid off. The IRS can and likely will revoke acceptance of your offer otherwise. It will reinstate the full amount of your original tax debt if you fail to comply with any of the contractual provisions.

Frequently Asked Questions (FAQs)