Glossary

Form 656-L – Offer in Compromise (Doubt as to Liability)

What is IRS Form 656-L and How Does It Work for "Doubt as to Liability"?

Form 656-L, “Offer in Compromise (Doubt as to Liability)”, is a specific application you file with the IRS when you dispute the accuracy or legality of a tax assessment. It allows you to potentially settle your tax debt for a lower amount if you can prove the IRS’s assessment is incorrect.

Okay, let’s break down Form 656-L. It sounds complicated, but it’s really just a way to tell the IRS, “Hold on a minute, I don’t think I actually owe this!”

What Exactly is an “Offer in Compromise?

First, let’s quickly talk about Offers in Compromise, or OICs. An OIC is an agreement with the IRS where they agree to accept less than the full amount of taxes you owe. There are different reasons you might apply for an OIC. Most people think of OICs for financial reasons, like “I simply can’t afford to pay”. However, there are other reasons too. Form 656-L is about disputing the debt itself. This is called ‘doubt as to liability’.

Form 656-L: Challenging Your Tax Bill

Form 656-L specifically deals with what we call “doubt as to liability.” Think of it like this: you’ve received a bill you don’t believe is correct. Maybe you think there was a mistake in how the IRS calculated your tax, or you believe some deductions were wrongly disallowed, and therefore you should owe less tax. You are not saying “I can’t pay”; instead, you are saying “I don’t owe that much.” That’s where Form 656-L comes in.

How Is It Different From a Regular OIC?

Most Offer in Compromise applications are for “doubt as to collectability”. This means you agree you owe the tax, but you’re saying you cannot afford to pay it back. With Form 656-L, you’re challenging whether you actually owe the amount. Instead of looking at your income and assets like in a regular OIC, the IRS looks at the reasons why you don’t believe you should owe.

How Does Form 656-L Work?

Identify the Issue: You need to figure out exactly why you believe the IRS is wrong. Was there a miscalculation? Did you disagree with the way the IRS interpreted the law? Was there some kind of error?
Gather Evidence: You’ll need to collect evidence to support your claim. This could include tax documents, receipts, legal opinions, and anything else that backs up your position. The more thorough you are, the better.
Complete Form 656-L: You’ll fill out the form very carefully, clearly explaining your arguments and providing all your supporting documents. This is the part where you present your case. Don’t simply state you disagree. You need to provide the concrete reasons why you disagree.
Submit the Form: You send your completed Form 656-L, including all your supporting documentation, to the IRS.
IRS Review: The IRS will review your application and assess whether your claim has merit. They might ask for more information. They might agree with you. Or they might reject it and not agree that you should owe less.
Negotiation: There might be some back-and-forth negotiations. The IRS may be willing to accept a lower amount than originally assessed, but it is very dependent on the strength of the case you make.
Acceptance or Rejection: The IRS will either accept your offer or reject it. If accepted, you agree to pay the new amount, and the matter is resolved. If rejected, you might have other options, like appealing the decision or going to tax court.

Who is Eligible?

Anyone who believes they have a valid reason to dispute a tax liability can file Form 656-L. It’s not about how much money you have. It’s about the accuracy of the tax assessment itself. This includes individuals, businesses, and estates.

Examples of When to Use Form 656-L

Incorrect Tax Assessment: Maybe you believe the IRS made a calculation error, or they incorrectly applied the tax law to your specific situation.
Disallowed Deductions or Credits: If the IRS disallowed deductions or credits you believe you were entitled to, you can use Form 656-L to dispute this.
Misapplication of Law: Sometimes the law itself can be interpreted in different ways. If you believe your interpretation is correct, you can challenge the IRS’s interpretation.
Innocent Spouse Relief: Although it is a more specific process, Form 656-L might be appropriate in certain “innocent spouse” situations, where one spouse is responsible for the tax liability, but the other is not.

Related Tax Concepts and Terms

Offer in Compromise (OIC): The general process of settling tax debt for less than the full amount owed. Form 656-L is a specific type of OIC.
Doubt as to Collectability: Another type of OIC where you argue that you cannot afford to pay the full tax debt. It’s different from doubt as to liability.
Tax Assessment: The process the IRS uses to determine how much tax you owe. Form 656-L challenges the accuracy of this assessment.
Statute of Limitations: The time limit the IRS has to collect taxes. Your offer does not stop interest or penalties.
Tax Court: A specialized court for tax disputes. If your Form 656-L is rejected, you might consider taking your case to Tax Court.

Tips for Filing Form 656-L

Be Thorough: Do not skimp on details. Provide a full explanation and all evidence to support your claims. If you do not show why you disagree with the IRS, the IRS will reject your application.
Consult a Tax Professional: This form is complicated. Consulting a tax attorney, a CPA, or an enrolled agent experienced in OICs is highly recommended. It’s important to make sure you understand the nuances of the process and the law.
Be Realistic: Even if you have a strong case, it doesn’t guarantee your offer will be accepted. The IRS will thoroughly examine the evidence and their own records. They must be convinced the liability is incorrect.
Don’t Delay: IRS tax problems don’t usually get better on their own. Take action quickly to resolve the issue.

Common Mistakes and Misconceptions

Thinking it’s a “Get Out of Jail Free Card”: Just because you file Form 656-L doesn’t mean the IRS will automatically accept your claim. You must prove your case. It is not a way to avoid paying taxes you legitimately owe.
Not Providing Enough Evidence: Many applications are rejected simply because the taxpayer failed to provide adequate supporting documentation or a proper explanation of their case.
Assuming It Stops Collection Efforts: Filing Form 656-L doesn’t automatically stop collection activity. The IRS can still take steps to collect the debt while they review your application. It does not automatically stop interest and penalties from accruing.
Confusing it with “Doubt as to Collectability”: Remember, Form 656-L is about disputing the debt itself, not just the ability to pay. This is crucial when filling out the form.

Conclusion

Form 656-L is a tool that allows taxpayers to challenge a tax assessment they believe is incorrect. It’s not about being unable to pay; it’s about showing the IRS that the debt they say you owe is inaccurate. It’s a complicated process, and it’s not something you should enter into lightly. However, with the right preparation and possibly professional help, it can be a way to resolve tax issues fairly and legally. If you truly believe you do not owe the amount the IRS claims, Form 656-L might be a good option for you to explore.

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