What forms do I need to complete and file with the Internal Revenue Service to submit an offer in compromise and settle my tax debt? This a common question a taxpayer may ask their tax attorney if they owe taxes to the IRS and are hoping to settle their tax debt. The answer in short is Form 656. The article below has been drafted by a Denver tax attorney at The McGuire Law Firm to explain Form 656 and its use in the offer in compromise process with the IRS.
Many taxpayers that owe taxes to the IRS wish to attempt to settle their tax debts through an offer in compromise. The form that is used to propose an offer in compromise is Form 656. Form 656 is completed by stating the taxpayer’s name, address and other contact information and social security number. Thereafter, the taxpayer must state the types of taxes and periods for which they are requesting to settle their debt through the offer in compromise. The taxpayer will state the reason for the offer in compromise, which is generally one of 3 options: 1) Doubt as to Liability: the taxpayer does not actually owe the tax. 2) Doubt as to Collectability: based upon the taxpayer’s income and assets they are unable to satisfy and pay the tax debt. 3) Effective Tax Administration: the taxpayer could pay the tax debt, but based upon the taxpayer’s circumstances, full payment of the taxes would create an economic hardship for the taxpayer.
In addition to the above, the taxpayer must state how they will pay for the offer in compromise and set the proposed terms for the offer in compromise. In proposing the payment terms to make payments on the offer in compromise there are generally two options. Option one is considered a cash offer and the taxpayer pays 20% of the offer in compromise when the offer is submitted to the IRS. The remaining amount of the offer is then paid in five or fewer payments within a specified time of the IRS accepting the offer in compromise. Option two is to make payments over 24 months. Thus, the taxpayer divides the offer amount by 24 and makes the first payment when the offer is submitted and then each month the taxpayer must make a payment per the terms submitted as if the offer amount was being paid to the IRS over 24 months. In comparing the 2 options, the cash offer may be preferred for a couple of reasons if the taxpayer can pay the amount in a shorter period of time. First, the taxpayer is likely to pay much less out of pocket to receive a determination from the IRS. Paying 20% down will be less for the taxpayer as soon as the taxpayer would make the 5th monthly payment if paying the offer over 24 months. Second, the calculation of a cash offer multiplies the taxpayer’s disposable income by only 12 months whereby the long term (24 months) payment option will multiply the taxpayer’s disposable income by 24 months. Thus, the taxpayer’s offer amount under the long term payment option may be more than if calculated under the cash payment option. Third, the taxpayer does not have to worry about sending in the monthly payment, which can be hassle. Further, the failure to make the monthly payment while the offer in compromise is being reviewed could lead to the IRS returning the offer.
Form 656 is submitted with the necessary financial statements. The financial statements a taxpayer will submit with their offer will depend upon their circumstances, but would include Forms 433A OIC and/or 433B OIC.
A Denver tax attorney at The McGuire Law Firm can analyze your tax issues and financial circumstances to determine if you could settle your tax debts with the IRS through an offer in compromise. Not every debt can be settled with an offer in compromise, and taxpayers should be weary of firms promising settlements without reviewing financial documents. Submitting an offer in compromise that has no chance of being accepted by the IRS only wastes the taxpayer’s time and money. Penalty and interest accrue while the offer is being reviewed and the collection statute is stopped. Thus, submitting an offer in compromise that has no chance of being accepted is very detrimental to a taxpayer.
Schedule a free consultation with The McGuire Law Firm to speak with a tax lawyer in Denver or Golden Colorado. Law offices in Denver and Golden- contact our tax law firm today!