Published on: October 24, 2020 Last modified: October 30, 2020

A Step-By-Step Guide to Filing IRS Form 656

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    Internal Revenue Service (IRS) Form 656 is one of several options you may have if you are unable to pay your tax debt. This form allows you to request a compromise from the IRS if you do not have the funds to pay the full amount you owe, and may allow you to settle your debt with a lower amount. 

    Although getting Form 656 accepted can be challenging, it can be a helpful solution for the right person. Here’s what you need to know about the form, the information you need to complete it, and what to do if you have questions about the process.  

    What is IRS Form 656?

    The primary goal of the IRS is to obtain the full amount of taxes owed based on your annual income, but the organization realizes there are certain circumstances that can make doing so impossible. Because it is not the goal of the IRS to force you to choose between your home and your taxes, you have several options if you find yourself unable to afford your full debt.   

    woman who can't pay debt forced to apply for irs form 656

    Form 656 was created to help people who are struggling to pay off their tax debts seek a compromise with the IRS. Under certain circumstances — such as unemployment or other significant financial hardships — you may be able to negotiate with the agency to pay a lower amount than that you currently owe.  

    Why is Form 656 Important?

    The IRS recognizes that there are certain circumstances in which accepting a lower payment may be in both of your best interests. Applying for an Offer in Compromise (OIC) by filing Form 656 is one of several options you may have if paying off your full tax debt is not an option. Here are a few facts to keep in mind:

    • You will need to submit Form 656 and either Form 433-A or 433-B. 
    • You will also want to gather other information that proves your current financial situation before starting to fill them out. 
    • This might include anything that explains why you are applying for a compromise and proves you do not have the funds to cover your taxes.
    • It might also explain why paying them would place you in extreme hardship, such as making you unable to cover your rent. 
    • You will need to describe your current income (if any), savings, assets, and monthly expenses, among other details about your situation. 

    If you are able to prove that your current situation prohibits you from paying the full amount you owe but allows for a lesser amount, you may be able to convince the IRS that accepting what you can offer is better than pushing for higher amounts that they may never receive.

    Steps to Take to Fill Out Form 656

    After you have gathered all the financial and personal information you need, you will be ready to fill out Form 656. This form consists of 11 sections and should not take very long to complete if you have all of your required information. 

    • Section 1: Provide your name, address, Social Security number, and other basic contact information.
    • Section 2: Identify the type of tax and tax period that the compromise you are proposing includes.
    • Section 3: Explain why you are requesting a compromise. Your options are Doubt as to Collectibility or Exceptional Circumstances. 
    • Section 4: Only fill out this section if you qualify for low-income certification, which exempts you from having to pay an application fee. 
    • Section 5: This is one of the most important sections of Form 656. It is where you identify the terms you are proposing in your offer. You will also need to declare whether you intend to pay off your tax debt in fewer than five months or more than five months if your offer is accepted.  
    • Section 6: Provide a deposit/down payment in the amount of one full month or 20 percent of the full amount. This section is optional at this stage in the process if you qualify for low-income certification.
    • Section 7: Identify the source of the funds you plan to use.
    • Section 8: This section explains the rights you have as far as making an offer and the responsibilities you will have if your offer is accepted. 
    • Section 9: Sign the form. 
    • Section 10: Only fill out this section if you are using a paid preparer to help you apply. 
    • Section 11: Authorize the IRS to discuss the information you provide in your application with a third party if you choose to do so.  

    Once you have completed these steps, you will be ready to submit your application to the IRS. You will need to mail in this form, along with Form 433-A or Form 433-B, your initial payment fee, and your $186 application fee (unless you are exempt from paying the application fee under the guidelines in Section 4). 

    Other Important Facts to Know About IRS Form 656

    Getting approved for a compromise can be more challenging than seeking a different option. Some of the most important things to consider when deciding whether to submit Form 656 include:

    ensuring bookkeeping is correct after applying for irs form 656
    • The low likelihood of your offer being accepted (approximately 33 percent)
    • Your tax filings must be current 
    • You will likely only be approved if the IRS believes it will get the highest possible amount of money by doing so 

    Need Help Filing Form 656?

    At Silver Tax Group, we realize that extenuating circumstances can have an impact on your ability to pay your taxes in full. Although applying for a compromise is not the best option for everyone, we will work with you to determine whether it may be a possibility for you. Contact us today to speak with our experts about IRS Form 656 or the other options you may have if you are unable to pay your tax bill.

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