IRS Form 656 is the official form used by taxpayers to apply for an Offer in Compromise (OIC), a program that allows individuals and businesses to settle their tax debt for less than the full amount owed. The IRS may accept an OIC if it determines that the taxpayer is unable to pay the full debt due to financial hardship or other qualifying circumstances.
There are three grounds on which the IRS may accept an Offer in Compromise:
- Doubt as to Collectibility: The IRS agrees that the taxpayer is unlikely to be able to pay the full amount owed.
- Doubt as to Liability: The taxpayer disputes the accuracy of the tax assessment.
- Effective Tax Administration: Even if the taxpayer can technically pay, doing so would create undue economic hardship.
To submit Form 656, the taxpayer must include detailed financial information (often through Form 433-A or 433-B) and pay an application fee, unless they qualify for a low-income waiver. The taxpayer must also propose a settlement amount, which may be paid in a lump sum or over a negotiated period. Once the form is submitted, the IRS reviews the offer, and if it is accepted, the taxpayer is considered to have satisfied their debt for the agreed-upon amount.