Every year, thousands of taxpayers learn they owe back taxes that they simply cannot afford to repay. Individuals who have been repaying a tax debt for several years may also come to realize they will never be able to repay the entire amount. What can they do? Does the IRS provide options other than repaying the tax debt?
Fortunately, the IRS does have a Fresh Start Program for seeking IRS relief from an insurmountable tax debt. And there’s better news! Wiztax can help you determine if you qualify for an Offer in Compromise to settle your tax debt for less than you owe.
What is IRS Form 656?
Form 656 allows taxpayers to ask the IRS to reduce the amount they owe. Basically to settle their debt for less than the full amount owed. Also called an “Offer in Compromise” (OIC), Form 656 does not guarantee the taxpayer’s request will be agreed to by the IRS. Instead, it is a proposed contract that the IRS may accept if they think the taxpayer does not have the resources to repay the tax debt. The IRS is more likely to accept this OIC if the taxpayer is current on other federal tax filings, have not filed bankruptcy and can pay the proposed reduced payments without issue. Wiztax takes the guesswork out. Our free online tool will determine your eligibility to apply and will show you your settlement offer amount.
Guide to Filling Out IRS Form 656
This form comes with an instruction booklet and other forms a taxpayer may need upon submitting Form 656.
IRS Form 656 Section 1:
Individual Information (Form 1040 filers)
Section 1 collects basic information about you as a taxpayer. Your name, address, phone number and so on.
Qualifying for low-income status: You may qualify for this depending on the adjusted gross income amount you filed on your latest 1040 individual tax return. Another way to qualify as low-income is if your household’s gross monthly income is at or below amounts found on the chart included on Form 656. If you qualify, you will not have to pay the Application Fee of $205 to the IRS when you file your offer. In addition, you may not have to include a 20% deposit of the offer amount. Wiztax will work with you on determining your eligibility here.
IRS Form 656 Section 2:
Business Information (Form 1120, 1065, etc., filers)
If you’re a business owner with tax debt, you will need to complete this section. This is typically for taxpayers that own an LLC or Corporation.
IRS Form 656 Section 3:
Reason for Offer
- You have reason to believe you are not liable for the debt amount (you must have documented proof of errors made by the IRS)
- You can show that the “collectability” of the debt owed is not feasible. In other words, you have insufficient assets and limited refinancing options to repay the debt
- You agree you owe back taxes but can’t prove your debt is uncollectible. However, you do believe it is unfair for the IRS to force you to repay the debt. This is referred to as an OIC based on Effective Tax Administration that is typically litigated by professional tax attorneys
IRS Form 656 Section 4:
Payment Terms
You can chose making a lump sum payment that includes your proposed payment over a one month to five-month period and at least 20 percent of your offer upfront.
Example: Ed owes the IRS $30,000 in back taxes. He asks the IRS to reduce his debt to $2,000. Ed can put down $400 (20 percent of $2,000) as a deposit and then $320 per month for 5 months upon acceptance ($2,000 minus the deposit of $400, leaves $1,600 which is then split into five monthly payments of $320).
Asking the IRS to agree to periodic payments means you wish to pay the offered amount of your tax debt but want the IRS to allow you anywhere between six months and 24 months.
Example: Mary owes the IRS $50,000 in back taxes but offers paying back $2,400 in monthly payments of $100 for 24 months.
These offer amounts, payback terms and monthly payment amounts are all automatically calculated and displayed by Wiztax.
IRS Form 656 Section 5:
Designation of Payment, Electronic Federal Tax Payment System (EFTPS), and Deposit
This section will be filled out if you want payments applied to a designated year and/or a designated tax debt. Leaving this section unfilled permits the IRS to apply payments to debts in the “best interest” of the federal government. Taxpayers may also specify where they want payments to go by indicating a preference each time they make a payment.
IRS Form 656: Section 6:
Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements
The IRS wants to know how you will make payments according to your offer and from what funding sources you plan to make payments.
IRS Form 656: Section 7:
Offer Terms
By submitting your offer, you agree to the IRS Offer in Compromise terms and conditions. This includes compliance with future tax obligations and an understanding that you remain liable for the full amount of your tax debt until all terms and conditions of the offer have been met.
Get Help with Filing Form 656 Using Wiztax
See your eligibility and offer amount for free by getting started. Rely on Wiztax to guide you step-by-step with our easy to use online system. If you decide to move forward with your filing, your form will be completed by Wiztax and you will receive everything in PDF. In addition, a Wiztax Expert will review your forms with you during our “Ready to File” Review and will answer all your questions.
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