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There are many IRS forms and schedules. If an individual or business owes taxes to the IRS and is seeking to resolve that liability through an Offer in Compromise, then they will use Form 656 to initiate that process.
This article was drafted by a tax attorney at the McGuire Law Firm in Columbus, OH to provide information regarding Form 656 and how it is used in the Offer in Compromise process for taxpayers in Columbus, Ohio.
What Is IRS Form 656?
Form 656 is titled “Offer in Compromise.” It is the form that must be submitted with every Offer in Compromise filed with the IRS, whether the offer seeks to settle individual tax liabilities or business tax liabilities.
What Information Is Included on Form 656?
Form 656 contains the critical information required for an IRS tax settlement.
Taxpayer Identifying Information
The form requires identifying details, including:
- Name
- Address
- Social Security number
- Employer Identification Number
Tax Periods Included in the Offer
The taxpayer must list the specific tax periods being included in the Offer in Compromise.
- Individuals list the applicable Form 1040 tax years
- Businesses may list 941 employment taxes, 940 unemployment taxes, and/or business income tax liabilities, along with the applicable periods
Reasons for the Offer in Compromise on Form 656
Form 656 requires the taxpayer to state the reason for the offer, which may include:
- Doubt as to Collectability – the taxpayer’s income and assets are insufficient to satisfy the tax debt
- Economic Hardship – payment of the tax would create financial hardship, even if the taxpayer has assets or income
- Public Policy or Equitable Grounds – although the taxpayer has the ability to pay, it would be inequitable to require payment based on the facts and circumstances
If the offer is based on economic hardship or equitable considerations, the taxpayer may explain their facts either directly on Form 656 or in an attached statement.
Payment Terms Proposed on Form 656
Form 656 allows a taxpayer to propose either a lump sum offer or a periodic payment offer.
Lump Sum Offer
- The taxpayer submits 20% of the offer amount with Form 656
- The remaining 80% must be paid within five months of acceptance
Example: If the offer amount is $20,000, the taxpayer submits $4,000 with the offer and pays the remaining $16,000 within five months after acceptance.
Periodic Payment Offer
- The offer amount is paid in 6 to 24 monthly installments
- The first payment is submitted with Form 656
- Monthly payments continue while the offer is under IRS review
Example: If the taxpayer proposes $48,000 over 24 months, they submit $2,000 with the offer and continue paying $2,000 monthly during the review process.
While payment terms may be adjusted during the review, once an offer is accepted, the taxpayer must comply with the terms stated on Form 656 to satisfy the agreement.
Other Important Items on Form 656
Form 656 also allows the taxpayer to:
- Designate payments to a specific tax type or tax period
- Identify the source of funds used to pay the offer, such as:
- Asset liquidation
- Loans
- Gifts from family or other sources
Additionally, the taxpayer must certify compliance by confirming that:
- All required tax returns have been filed
- All estimated payments have been made, if applicable
- All federal tax deposits have been made, when required
Speaking With a Columbus, Ohio Tax Attorney About Form 656
If you are attempting to resolve your IRS tax liability through an Offer in Compromise, Form 656 is a critical document. You may wish to consult with a tax attorney regarding the proper completion and submission of Form 656 and any required supporting documents.
You can contact The McGuire Law Firm to speak with a Columbus tax attorney who assists clients throughout Ohio (OH) with Offer in Compromise matters and IRS tax resolution options.