What Is IRS Form 656? (And Should You File It Alone?)

If your tax debt has become overwhelming, the IRS Form 656 could be the solution. This form is part of the Offer in Compromise process, which may allow you to settle your tax debt for less than you owe. However, there’s a catch. File it incorrectly, and you could end up wasting your time, money, and — perhaps worst of all — your only shot at IRS tax relief. 

Chances are, you’ve heard about this form but don’t know where to begin or how it works. If so, you’re not alone. Understanding what the IRS Form 656 is, how to file it, and when to seek professional help is a good place to start. And, if you’re not sure where to start, contact our team at Seattle Legal Services. We can help you navigate even the trickiest of IRS issues. 

Key Takeaways

• The IRS Form 656 is the official way to request an Offer in Compromise, which can help you settle your tax debt for less. 
• You need to submit the form alongside detailed financial disclosure forms and a non-refundable fee. 
• The Form 656-B is a booklet that includes the form itself, plus guidelines and a checklist to follow.
• If you fill out the form alone, you run the risk of getting rejected for avoidable errors. 
• A tax expert can help you calculate a realistic offer and boost your chances of the IRS accepting it.

What Is the IRS Form 656?

The IRS Form 656 is the official request form for an Offer in Compromise (OIC). If you owe more than you can afford to pay to the IRS, this route may allow you to settle your debt for less. This program is available to both individual taxpayers and businesses. 

To qualify, you will need to submit the completed Form 656 along with detailed financial forms. You should complete either Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, depending on which applies to your circumstances.

When you’re facing tax debt, this is your chance to negotiate fairly with the IRS. By submitting the forms, you’re essentially saying that you don’t have the money to settle the entire debt, but that you can offer a smaller amount. Think of it as your official proposal to the IRS. 

Form 656 vs. Form 656-B: What’s the Difference?

It’s likely that you’ve heard of both the Form 656 and the Form 656-B. But what’s the difference? You can’t actually download the Form 656 by itself. Instead, it comes as part of a larger booklet, known as the Form 656-B. The pack includes: 

• Form 646: This is the main part of the booklet. It’s the official form you use to request an Offer in Compromise (OIC) from the IRS. 
• Financial disclosure forms: You will also need to fill out the associated financial disclosure forms accurately. 
• Eligibility guidelines: This is an overview of who is eligible for an Offer in Compromise (OIC). You will need to read this information thoroughly. 
• Payment instructions: Details of how you can make payments to the IRS. 
• Checklists: You can use this to ensure you complete all of the relevant information when you’re submitting the Form 656.

The booklet is your complete tool-kit when submitting an Offer in Compromise (OIC). It walks you through the forms with straightforward steps you can follow. However, even with this information, the process can be tricky to navigate alone. There are plenty of potential pitfalls that can derail your application. To give yourself the best odds, contact a tax professional first.

What You’ll Need to Submit with the Form 656

When making an Offer in Compromise (OIC), you will need to do more than simply fill out the Form 656. Here’s a rundown of what else you have to include: 

Financial disclosure forms

You should also file a completed Form 433-A (OIC) or Form 433-B (OIC). These relief forms require additional financial documents, such as bank statements, pay stubs, asset valuations, and detailed expense information.

Application fee

When submitting the Form 656, you have to pay a one-off, non-refundable application fee. This is currently set at $205. Keep in mind that, if for any reason your application is unsuccessful, you will not be able to get this money back.

Down payment

Unless you’re applying based on a “low-income certification,” you must include a down payment, which will go toward your overall offer. If you’re offering a lump sum, this will typically be 20% of that figure. On the other hand, if you’re opting for a periodic payment system, you should include your first payment.

For example, if you’re offering $10,000 to settle your tax liability in a lump sum, the down payment should be $2000. If you’re offering to pay $2400 over a 24-month period, your down payment should be $100 (the equivalent of one monthly payment)

Additional evidence

Finally, the IRS requires you to include additional evidence about your financial situation. This includes proof of your income, any expenses, assets, and liabilities. It’s important to make sure these are in order and accurate before you submit them.

Failing to submit completed documentation to the IRS is one of the most common reasons Offers in Compromise (OIC) get rejected. Remember, the IRS needs to see your complete financial picture before deciding whether to accept the offer.

Explained: How to Fill Out Form 656 

When you first take a look at the Form 656, you might think it looks relatively straightforward. However, each section has specific requirements that you must get right. 

First up, you should select the reason for your offer. For instance, you might select “Doubt as to Collectibility,” which means that you can’t pay the full amount of debt you owe. Other options include ‘Effective Tax Administration,’ meaning if you paid it would put you in financial hardship.

Next, you will need to include your total offer amount and the payment terms. You can choose between a lump sum offer or periodic payments. Lump sums are typically paid within five months, while period payment plans last for up to 24 months. You’ll need to fully understand the IRS collection standards to decide what amount to offer and which approach suits you.

The form will also ask which tax periods the Offer in Compromise (OIC) applies to. You’ll also need to sign under penalty or perjury, which means that any false information you give can lead to serious consequences — far beyond merely having your offer rejected. Finally, you’ll need to attach any supporting documentation via the Form 333-A (OIC) or Form 333-B (OIC).

Should You File IRS Form 656 on Your Own?

Technically speaking, you can file the Form 656 by yourself. However, unless you’re extremely familiar with the IRS financial guidelines and procedures, you may want to get help. Let’s take a look at why you should work with a tax professional: 

Help calculating a reasonable offer

Tax experts understand IRS standards and can help you to calculate a realistic offer amount when submitting an Offer in Compromise (OIC). Getting this part of the process right will significantly help your chances of being accepted. About half of all offers are rejected every year.

Potential to reduce your settlement 

Additionally, a tax expert has the knowledge to identify when you can increase spending in certain categories, optimizing your financial position ahead of making an offer. This could lead to a reduced overall settlement. Applying without this nuanced knowledge may cost you more in the long run.

Understanding of the documentation process 

Documentation and proper legal framing can trip up taxpayers who attempt to submit this form alone. Working with a knowledgeable professional is the answer. They can help you make sure you have the specific type of evidence that the IRS wants to see for this offer. 

Avoiding rejections because of simple errors

Even the simplest of errors or technical issues can result in a rejection. When that happens, you’ll lose your non-refundable fee and any payments you’ve made. These will go towards paying off the tax you owe, but you cannot get them back. 

Saving time and protecting your finances 

Working with a tax expert will help you to protect your funds from being applied to your balance without approval. It doesn’t end there. The right professional can help you navigate this process quickly and easily, saving you time and energy.

If you’re interested in submitting an Offer in Compromise (OIC), put yourself in the best possible position. Contact us at Seattle Legal Services today.

What Happens If You Don’t Qualify for an OIC?

Not everyone will qualify for an Offer in Compromise (OIC), but that’s not the end of the story. There are other tax relief options depending on your situation. These include the following:

• Installment agreements: Make monthly payments on your tax debt until it’s paid in full. Learn more about installment agreements vs. offers in compromise.
• Currently Not Collectible (CNC) status: Facing serious financial hardship? This status can provide temporary relief until your situation improves. 
• Partial pay plans: This option may allow you to make reduced monthly payments if you can’t afford the full amount.

In rare cases, bankruptcy may also be an option. However, this is a final resort, and there are also strict rules on when tax debts can be discharged. 

While it can be overwhelming at first, the above options are there to support you in clearing your tax debts. Remember, working with a professional means you can determine the best choice based on both your situation and your finances. 

Form 656 Is Powerful (But Risky Without Help)

Submitting a successful Offer in Compromise (OIC) can wipe out tens of thousands or even hundreds of thousands in IRS tax debt, but only if you get it right. Filing this form alone is much like representing yourself in court. It’s technically allowed, but it’s risky and can often be ineffective. 

Ready to get started? Contact Seattle Legal Services now to discuss whether Form 656 is right for you and how to structure an offer that the IRS is likely to accept. 

FAQs

What is the difference between IRS Form 656 and 656-B?

Form 656 is the application form for an Offer in Compromise (OIC), while Form 565-B is the complete booklet including the financial disclosure forms, guidelines, and checklists. 

Can I file Form 656 electronically?

No, you need to send this form by mail. The IRS doesn’t currently accept Form 656 electronically for Offer in Compromise (OIC) applications. 

What happens if my offer is rejected?

Should your offer be rejected, the IRS will keep both your fee and any payments you made alongside your offer. These will go towards paying off your total tax debt. You may be able to submit the form again, but you will need to make new payments to do so.

How long does it take to hear back on my OIC?

You should expect to wait several months or even more than a year to hear back about your Offer in Compromise (OIC) application. While the IRS has been working to lower the wait time, complicated applications can slow things down. When you have submitted your forms, most collection action will be put on hold. 

Can I get my money back if my offer is denied?

No. When you submit the fee and down payments, you need to understand that these are non-refundable. If your offer is denied, the IRS will apply these amounts to your outstanding tax debt, and you cannot get any type of refund. That’s why you want to get this right the first time.

Do I still owe penalties and interest while waiting for a decision?

Interest will continue to mount up while you’re awaiting a decision. The IRS will also continue adding the failure-to-pay penalty to your account (unless it has maxed out at 25%).