How to Ask the Internal Revenue Service for Offer in Compromise

We are all faced with economic challenges, especially in these tough times---but what if one of these challenges involves the IRS? You have found yourself behind in your income taxes and not sure which way to turn. One option: Ask the Internal Revenue Service for an Offer in Compromise (OIC), which is a settlement agreement to pay less than the full amount owed the IRS; you can make this offer if you cannot pay your taxes via lump sum or an installment agreement (see "Tips and Warnings").

Things You'll Need

• Acrobat Reader
• Form 656, Offer in Compromise
• Form 656-L, Offer in Compromise (Doubt as to Liability)
• Form 656-A
• Form 656-B
• Form 656-PPV
• Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals
• Form 433-B, Collection Information Statement for Businesses

Instructions

1. Gather your financial information: W-2s, tax returns, etc.

2. 

   Download the latest "Offer in Compromise" package from the official IRS website. This package is in PDF format and is titled "Form 656-B Offer in Compromise Booklet." The package will contain all the necessary forms and worksheets to apply for an OIC---all forms except FORM 656-L.

3. Determine which of the two form choices you should file: FORM 656 or FORM 656-L FORM 656 is the official form used when you cannot pay your taxes in one lump sum or in installment payments. If you file FORM 656, you may also have to file FORM 656-A. You will also have to file either FORM 433-A or FORM 433-B, depending upon your ability to pay the $150 application fee. FORM 656-L is filed when you believe the tax liability is incorrect but you still want to make an OIC. In this case, you will not have to file the additional forms. Make sure you file the most current version of FORM 656 or 656-L.

4. Go to Section 2, if you are filing FORM 656. If you are filling FORM 656-L, go to Section 3.

Submitting Form 656, Offer in Compromise

1. 

   Fill out all required information on the first four pages of FORM 656 (five pages total). Also complete the fifth page if you are requesting a waiver of the $150 application fee.

2. 

   Complete FORM 656-A (one page total) if requesting waiver of $150 application fee. You must attach it to the front of FORM 656. This option is only open to individual taxpayers.

3. Determine which of the two form choices you should file: FORM 433-A or FORM 433-B.

4. 

   Complete FORM 433-A (six pages total) if you are a wage earner or self-employed individual.

5. 

   Complete FORM 433-B (six pages total) if you are a business.

6. Mail your OIC application package and fee to the appropriate address for your specific state of residence. See FORM 656-B booklet.

7. 

   Submit FORM 656-PPV every time you make a monthly payment based on your application offer. Continue to make your monthly payments during the investigation period--until you receive a decision letter (see "Tips and Warnings").

Submitting Form 656-L (Doubt as to Liability)

1. 

   Follow the instructions included with FORM 656-L (Doubt as to Liability OIC) to complete this two page application.

2. Mail FORM 656-L along with $150 application fee to
   Brookhaven Internal Revenue Service
   COIC Unit
   P.O. Box 9008
   Holtsville, New York 11742-9008

3. Submit FORM 656-PPV every time you make a monthly payment based on your application offer. Continue to make your monthly payments during the investigation period--until you receive a decision letter. See "Tips and Warnings" sections.

Tips & Warnings

• Per IRS, the general rule of thumb in determining how many OICs and application fees to file is "one fee and form per entity." Thus, whether you are filing individually or jointly, you can most likely file one form and one application fee. The $150 application fee is refundable if IRS denies the Offer in Compromise. However, "the IRS will keep any refund, including interest due, because of an overpayment of any tax or other liability, for tax periods extending through the calendar year [in which] the IRS accepts the OIC." Be careful when deciding to pursue an OIC: "The IRS will keep all payments and credits made, received or applied to the total original tax liability before the OIC was submitted." Still, you can "designate in writing how the IRS should apply payments made with the filing of the offer and while an offer is under investigation." NOTE: "Without a written designation, payments will be applied to the tax liability and in the government's best interest. The $150 application fee cannot be designated, but is applied to the tax liability and in the government's best interest." The IRS will waive the $150 application fee only for individuals whose income falls at or below certain low income guidelines as outlined in Form 656-B booklet. A few criteria that IRS will judge you on include: You cannot pay the lump sum and you cannot do an installment agreement; you have exhausted your search in making other payment arrangements; you do not have an open bankruptcy as a debtor What OIC payment options exist? Lump sum cash payments made in five or less non-refundable installments. The initial request for this option must include payment of 20 percent of the amount owed, the application fee of $150 and a signed FORM 656-A. Short term periodic non-refundable payments made within 24 months of IRS receiving offer. The initial request must include the first payment, the $150 application fee and a signed FORM 656-A. Deferred periodic non-refundable payment must be paid over the course of the remaining statutory limit for collecting the tax. The initial request must include the first payment, the application fee of $150 and FORM 656-A Agreement variations within the above payment option schemes exist. An OIC investigator may counter with different terms and amounts or may suggest a larger amount or different terms that would be acceptable to IRS. Once an agreement is finalized and IRS accepts your Offer in Compromise, you must adhere to the payment arrangement; otherwise, "failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn." Use the "Offer in Compromise Summary Checklist" provided in Form 656-B to make sure you have not overlooked any submission requirements. If you believe you do not owe any of the tax liability, FORM 656-L includes information on your options.

• Do not file an Offer in Compromise if you are not current in filing prior year tax returns. See Form 656-B package, Section titled "What we need to fully evaluate your offer." The IRS will accept an Offer in Compromise under three conditions: 1. There's serious doubt you'll ever be able to pay your taxes before the statutory collection period expires. 2. You seriously, legitimately, doubt that you owe the taxes due to some mistake on the IRS examiner's part. 3. While there is no doubt that you do owe the money, and under normal circumstances you could in fact pay it, but payment would create an economic hardship and/or would be unfair and inequitable for you; example, you incur long term medical care expenses for a child. If your Offer in Compromise is accepted, IRS is required by law to make certain information regarding your OIC available for public inspection and review. See Form 656-B package, Section titled "Important information regarding the Offer in Compromise." The IRS strongly urges taxpayers to beware of claims that your tax debt can be settled for pennies on the dollar.

References

• IRS website article "What you must know before filing an Offer in Compromise"
• IRS website article "What is an Offer in Compromise" section Payments and Application Fees
• IRS article "Check carefully before applying for Offers in Compromise."

Resources

• IRS Installment Agreement
• Form 656-B OIC booklet