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How to Complete Form 656 OIC
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 Offer In Compromise
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Opening music plays in the background Form 656 OIC Form 656 – Offer in Compromise Now it is time to fill out a Form 656 which is the offer and compromise or OIC application.
It’s used to submit an OIC with the Internal Revenue Service.
You’ll find the actual Form 656 at the end of the Form 656 OIC Booklet.
But first, here’s a tip.
Many times taxpayers get confused and put too many different requests on the same offer.
They often include multiple entities on one offer instead of correctly submitting separate offers for each entity.
For example, including corporate liabilities on an offer with individual liabilities, or including joint liabilities along with separate individual liabilities on one offer instead of submitting two offers.
If you and your spouse have joint tax debts and you or your spouse are also responsible for separate tax debts including Trust Fund Recovery Penalty, you will each need to send in a separate Form 656.
You will complete one Form 656 for yourself listing all your joint and any separate tax debts and your spouse will complete one Form 656 listing all his or her joint tax debts plus any separate tax debts, for a total of two Forms 656.
If you and your spouse or ex-spouse have a joint tax debt and your spouse or ex-spouse does not want to be part of the offer, you may submit a Form 656 to compromise your responsibility for the joint tax debt.
OK, now let’s begin.
This form is going to start off by asking you if you have used the pre-qualifier tool located on www.IRS.gov The IRS strongly encourages you to use this tool before you go through the lengthy process of submitting an offer for individuals.
You can check yes or no depending on whether you did.
You will see here that the Offer in Compromise program does require an application fee and an initial payment with the Form 656, unless you qualify for the low income certification, and that you must complete a Form 433-A (OIC) for individuals or a 433-B OIC for corporations.
If you are an individual who owns a corporation or LLC then you must also submit the Form 433-B.
The form also requires some supporting documentation.
If you have any questions on what supporting documentation, it is explained towards the end of this application and on the Form 433 A or B OIC.
Individual taxpayers information Section 1 is going to be our individual information for individual taxpayers, in other words, our Form 1040 filers.
You put in your first name and last name, social security number and physical home address here.
Now, if you have a different mailing address, a post-office box or anywhere else where you get mail, then you'll want to put in your mailing address here as well.
If the address is new and you would like the IRS to update their records with your new address, check the box here.
If you have an employer identification as a sole proprietor, then you want to go ahead and put that here as well.
Then down here, we're going to mark the individual tax periods if your offer is for individual tax debt only.
For example, if you owe taxes for 2010 through 2015, don't put 2010 through 2015 or 2010 dash 2015.
You want to make sure to list each individual year that your offer is going to cover.
For example: 2010, 2011, 2012, 2013, 2014 & 2015.
If you have trust fund recovery penalty, you will put that here.
You will need to enter the business name associated with the trust fund recovery penalty on this line here.
Form 941 and 940 taxes would go here, and if you have any other federal tax you would specify the type and the period.
List each period by the quarter ending date.
For example, the first quarter of 2015 would be written as March 31, 2015.
You will see here that it says if you need more space to use an attachment and title it, attachment to Form 656 dated and make sure to sign and date the attachment as well.
Low-income certification for fee waiver Moving on to the second page of this form.
So, you'll remember on the first page, one of the first things I said was that you must have an application fee and an initial payment to submit an offer in compromise.
However, this could be waived if you qualify, as an individual, for the low-income certification.
Do you qualify for low-Income certification?
You qualify if your adjusted gross income, as determined by your most recently filed Individual Income Tax return, Form 1040 or your household's gross monthly income from Form 433-A OIC x 12, is equal to or less than the amount shown in the chart based on your family size and where you live.
If you qualify, you are not required to submit any payments or the application fee upon submission or during the consideration of your offer.
Businesses other than a sole proprietorship do not qualify for the low-income certification.
If you check either of the next two boxes stating you qualify for the low-income certification, you would not be required to submit the application fee or any payments until the offer is accepted.
And, the IRS will verify whether you qualify for low-income certification.
Taxpayers qualifying as low-income or filing a doubt as to liability offer are not required to pay the application fee, the 20% payment on a lump sum offer, or the initial partial payments on a periodic short term or deferred payment offer.
Business information Moving down to Section 2 is for business information.
If your business is a corporation, partnership, LLC or LLP and you want to compromise those tax debts, you must complete this section.
So, if you have tax debt for business returns you put that here.
You must also include all required documentation including the Form 433-B OIC and a separate application fee and initial payment.
Businesses do not qualify for the low-income waiver of the application fee, the initial 20% lump sum offer payment or the initial partial payment on periodic payment offer.
You can submit an offer in compromise for a business that is in operation.
However, there are going to be some very strict qualifications that the IRS looks at for this.
If you are dealing with payroll tax and you are offering less than the actual tax due on the payroll debts, it's very unlikely your offer will be accepted without the IRS assessing you with some trust fund recovery penalties.
You may be asked to get a professional third-party business valuation of your business, and these can get pretty expensive.
So, it's something you may want to look into the cost of and weighing your pros and cons.
So, you put in your business name, business address, your employer identification number, the name, and the title of the primary contact for the business and the phone number.
Same thing down here with the business tax periods.
You'll need to type in each separate tax year.
Don't type them as 2010 dash 2015.
List all tax periods you owe balances on; for example: Form 941, tax periods 3/31/2019, 6/30/2019, 9/30/2019, and Form 940 tax period 12/31/2019.
Reason for the Offer Section 3 is going to be the reason for the offer.
Most applicants are going to submit their offer based on doubt as to collectability, stating they have insufficient assets and income to pay the full amount.
There are a small number of taxpayers that will qualify for the effective tax administration offer even though they can fully pay their tax liabilities.
However, this is a completely different way of submitting an offer and this video is not intended to address this type of offer.
Form 1040 or your household's gross monthly income from Form 433-A OIC x 12, is equal to or less than the amount shown in the chart based on your family size and where you live.
If you qualify, you are not required to submit any payments or the application fee upon submission or during the consideration of your offer.
Businesses other than a sole proprietorship do not qualify for the low-income certification.
If you check either of the next two boxes stating you qualify for the low-income certification, you would not be required to submit the application fee or any payments until the offer is accepted.
And, the IRS will verify whether you qualify for low-income certification.
Taxpayers qualifying as low-income or filing a doubt as to liability offer are not required to pay the application fee, the 20% payment on a lump sum offer, or the initial partial payments on a periodic short term or deferred payment offer.
Payment terms: Lump-sum vs. Periodic payments Moving on to Section 4 this is going over your payment terms.
There are two different ways that you can submit an offer.
You can: 1.) do a lump-sum offer or you can 2.) do a periodic payment offer.
Here's another tip so you don't get tripped up when completing this section.
Many taxpayers check the box for both the Lump Sum offer terms and the Periodic Payment offer terms instead of just one.
They'll have the same offer amount with two different types of payment terms.
It is important. Chose just one, either Lump Sum or Periodic Payment.
If you're doing the lump sum cash offer, you would check this box here and you would enclose a check for 20% of the offer.
This 20% is sometimes called the TIPRA payment.
This amount is required by the 2005 Tax Increase Prevention and Reconciliation Act or TIPRA.
However, this is waived if you meet the requirements for the low-income certification.
So, the total offer amount is $20,000 and if we don't qualify for the low-income certification, we're going to include our 20% initial payment of $4,000 leaving a balance of $16,000.
Now with the lump sum cash offer, you can pay that balance off over five months after acceptance of the offer.
So, you don't have to pay anything while the offer is being considered, but your payments cannot exceed five months from the date of acceptance to qualify for this.
So, at this point, you can break down the remaining $16,000 into monthly payments of $3,200 a month for the five months after acceptance.
You can also make one lump sum payment due within the five-month period.
The periodic payment offer is an offer set up where you're making monthly installment payments against the amount you're offering throughout a two-year period while the offer is under consideration, until that two years expires.
So for an offer amount of $24,000, it would be divided by 24 and it comes up with $1,000.
So a payment of $1,000 is made with Form 656 and additional payments of $1,000 would be made on the 28th day of each month for a total of 23 more months.
Since we're not using the low-income waiver, we're making our initial TIPRA payment of $1,000.
And those numbers when added together come up to the $24,000 at $1,000 per month for a total of 24 months.
Remember this payment option requires you to continue to send your monthly payments while the IRS is considering your offer.
Many taxpayers make errors in calculating payment amounts to match their offer amounts, so please double check this section of your offer before submitting it.
Designation of Payment and Electronic Federal Tax Payment System EFTPS Designation of Payment and Electronic Federal Tax Payment System (EFTPS)
Section 5 is going to be your designation of payment.
This section is for if you have a specific tax period where you want your payment to go You would put that in here.
IRS now has an option for making an OIC payment through the Electronic Federal Tax Payment System.
EFTPS allows you to go online and make a payment for your offer in compromise and if you do that you can mark this box here saying yes.
Provide the amount of the payment, the date paid, and you'll also need the EFT number.
It's fifteen digits that you get when you made that payment.
You need to make sure that gets entered here so that the IRS can track that payment and allocate it toward your offer.
Another reason for this section is in the event an offer is denied, you can have a pre-designation of where you want these payments applied, so that they're applied towards a tax period that you want to try and pay off.
Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements Source of Funds, Making Your Payment, Filing Requirements and Tax Payment Requirements is in Section 6.
This is asking where you are coming up with the money to pay this offer.
If you're borrowing it from friends or family, you'll put that here.
Maybe you're borrowing it from a retirement account or you're just going to adjust expenses to be able to afford it just explain this.
This section also explains to you here how you're going to make checks payable.
You want to make sure you're following those guidelines to get them applied properly on your account.
Make checks payable to the United States Treasury and attach them to the front of your Form 656, Offer in Compromise.
All payments must be in U.S. dollars.
Do not send cash.
Send a separate application fee with each offer; Do not combine it with any other tax payments as this could delay processing of your offer.
You may also make payments through the Electronic Federal Tax Payment System (EFTPS).
This is important.
Your offer will be returned to you if the required application fee and payment are not included or if your check is returned for insufficient funds.
And then the form is going to go over some filing requirements.
On these filing requirements, you want to mark one of these boxes you have filed all required tax returns, or you weren't required to file tax returns for the following years and indicate which ones.
Let's say that you didn't have any taxable income for 2016, so you won't be filing a return for that year.
You'll want to make sure that you mark that box here, so the IRS doesn't think it's a missing return.
In order to submit an offer, you must be compliant with your tax obligations.
This includes your tax filings and your tax payments such as estimated tax payments for the current quarter and federal tax deposits for the prior two quarters.
If you're self-employed or if you don't have enough federal tax withholding and you're required to make estimated tax payments, you're going to have to be required to pay those.
These four checkboxes here give you different options that you can check based on your situation.
You'll want to make sure that you check the applicable boxes so the IRS will know you've made all required estimated tax payments and/or federal tax deposits, or that you're not required to make ES payments and/or federal tax deposits for the current tax year.
The IRS will also verify your compliance by checking internal records.
Offer Terms Section 7 is your offer terms.
You'll want to make sure you read these and fully understand what you're signing and agreeing to when you're submitting an offer in compromise.
Signing the Offer and Form 656 Wrap-up And Section 8 is where you're going to sign and date the form.
You are signing under penalties of perjury, so you'll want to make sure everything in here is correct.
And if you do decide to pay someone to prepare this form for you, make sure they fill out the paid preparer section.
The rest of this form is for IRS use only.
And please, don't forget to sign your offer this is actually a common error!
Now, an offer in compromise does suspend the collection statute expiration dates while your offer is being investigated by the IRS.
And if the IRS rejects an offer and you do not appeal the rejection, the collection statute expiration date is extended for another 30 days.
If the IRS rejects an offer and you file a timely appeal, then the collection statute expiration date is extended for the period during which the Independent Office of Appeals reviews the rejection.
You want to make sure if you're submitting an offer in compromise that One - You're submitting it properly and including all information so it can be accepted.
Two - You're submitting something that has a possibility of being accepted and that you can pay the offer amount and stay current with your tax obligations as well.
So be very confident that you're submitting a proper OIC.
Thanks for watching.
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