Tax FAQs: What is Form 656?

April 1, 2020

If you are one of the 14 million Americans who owe the IRS back taxes, you may feel anxiety every time your phone rings. You may worry when you hear a knock on the door. You may even feel anxious when you open your mail. But you don’t have to live in fear anymore. All you have to do is contact Geaux Tax Resolution in Lafayette, LA and file Form 656. Read on to learn more.

Tax FAQs

What Is Form 656?

IRS Form 656, also known as the Offer in Compromise, is a proposal made to the IRS that results in you paying only a portion of the tax debt you owe. For instance, if you owe $26,000 in back taxes, you may use this form to propose that you pay “only” $10,400. It’s a simple concept, but it’s hard to qualify.

Form 656 is for people who have a reasonable, articulable reason to not pay their full tax balance. In fact, the IRS rejects many proposals they receive. That’s why it’s so important to seek professional help rather than filing the form yourself.

What Counts As Reasonable, Articulable Reasons?

There are three circumstances under which the IRS will consider an offer in compromise. The first is if there is doubt regarding the collectibility of your delinquent taxes. The second is if there is a doubt regarding your liability for the debt in question. The third is if writing off a portion of your debt would be considered effective tax administration due to an exceptional circumstance.

What Counts As Doubt Regarding Collectability?

“Doubt as to collectability” refers to a taxpayer that will probably never be able to pay their delinquent federal income taxes in full. This reasoning should be used if you have no doubt that you owe the IRS, but you can’t afford to pay it and you also don’t have assets you can refinance or liquidate so you can afford to pay your tax debt, and you can’t get approved for an unsecured loan.

This is the primary reason why people file Form 656. However, if you try to file this form for doubt regarding collectability on your own, the IRS may come back with a counter-proposal that you arrange a long-term installment agreement or partial-pay installment agreement.

What Constitutes Doubt As to Liability?

Doubt as to liability means that you doubt you are actually liable for the tax debt the IRS says you owe. You must submit a statement clearly articulating why you believe you do not owe this debt. Most people feel that it is easier to work out a payment arrangement than write this statement, even when they truly believe they do not owe the tax debt.

However, the best course of action if you do not want to explain doubt as to liability is to file an amended tax return. Depending on your unique situation, you may also benefit from asking for an audit reconsideration, requesting penalty abatement, or requesting innocent spouse or injured spouse relief.

What Does Effective Tax Administration Mean?

When you claim effective tax administration, you are saying that you have the cash or assets you can liquidate to pay your delinquent tax debt. However, doing so would cause serious economic hardship. Collecting your entire balance due would be unfair and inequitable. Alternatives to this include a penalty abatement or some sort of installment agreement.

Why Didn’t the IRS Process My Friend’s Application?

It is not uncommon to hear of someone whose offer in compromise was not processed. Unfortunately, an offer in compromise cannot be processed unless a taxpayer sends in all the appropriate documentation. Here is a comprehensive list of what must be submitted when you send in an offer in compromise:

  • Form 433-A or Form 433-B and support document
  • $186 application fee or fee waiver request
  • No open bankruptcy case form
  • Proof of having filed all federal tax returns you were required to file
  • Current estimated taxes OR
  • Income tax withholding for the current year

Are There Any Exceptions to This Rule?

If you are requesting an offer in compromise due to a reasonable, articulable doubt as to liability, you do not need to send in the collection information statement (Form 433-A). Form 433-A is for individuals to file, and form 433-B is for businesses to file.

What Are the Payment Terms of an Offer in Compromise?

When you file your offer in compromise, you must decide the payment terms you would like to ask for. These are effective on the date the IRS accepts and approves your offer in compromise. Many people request a deferred payment. However, others ask for a short-term deferred payment arrangement. Everyone needs to make a good-faith cash payment.

Short-term payment arrangements you can choose include 10, 30, 60 or 90 days after the date you receive written notice from the IRS that your offer is accepted. Obviously, these are the preferred repayment terms for the IRS.

What If I Can’t Afford to Pay My Proposed Amount in Three Months?

If you can’t comfortably afford to pay your proposed amount in full, you’re not alone. The IRS allows for two payment options for taxpayers like you. First, you may make a lump sum payment within three months. Then, you can make monthly installments for up to two years from the date of acceptance (21 months after your first payment).

Alternatively, you can make a lump sum payment within 90 days of the IRS accepting your offer in compromise. Then, you can make installments until the statute of limitations is up for your debt. In most cases, this is 10 years from the original due date. Note that the IRS or you may extend the statute of limitations.

What Else Should I Know About My Proposal?

The IRS does not just need to know the schedule of your payments. It also needs to know how you will pay the amount you are offering in compromise. For instance, if applicable, you need to note if you are refinancing your mortgage or selling your house to repay your tax debt. The IRS may already have a lien placed on your home.

Similarly, it needs to know if you are repaying your tax debt with a loan or gift from your family. If you receive a gift of over $15,000 (including debt repayment), the person giving the gift needs to file and pay gift taxes.

What If My Family Member Can Afford My Tax Debt But Not the Gift Tax?

If you have a family member who can afford to pay off your federal income tax debt but not the gift tax, he or she may not have to file the gift. In 2020, there is an $11.58 million lifetime exclusion. Therefore, if you receive $20,000 in debt repayment, the gift giver can claim the $5,000 that is above the $15,000 annual gift applies to his or her estate and the $11.58 million exclusion.

Schedule Your Initial Consultation Today

You don’t have to live in fear of the IRS. The best defense is an aggressive offense. If you can’t afford to pay the IRS, schedule your free initial consultation with Geaux Tax Resolution in Lafayette, LA today. We can help you file an offer in compromise or work out another solution that is better for your unique needs.