Believe it or not, you can settle a tax debt with the IRS for a smaller amount than what you owe. What makes it possible is one document, Form 656. Using this form, you can build a case proving you are not able to pay the full amount owed to the IRS. If the IRS sees that the only way of getting money out of you is to agree to lower the tax debt, they will accept the offer.
Take note, there are conditions. Your request may be rejected or be deemed ‘unprocessable’. There are no guarantees of acceptance.
Form 656 Under the Microscope
If it’s almost impossible for you to keep up with your taxes, debts will have a terrible snowball effect. With each missing tax payment, the interest and penalties will come back to haunt you. Taxes are a train with no brakes. You won’t be able to catch up if you keep missing payments. Form 656 gives you the opportunity to lower what you owe the IRS.
Also referred to as an “offer in compromise” (OIC), the form allows the IRS to get a deeper understanding of your difficulty and why it is so hard for you to pay up all your tax bills. Based on their findings, they can determine a more suitable arrangement for you as a taxpayer.
Reasons for Using Form 656
Form 656 can help in one of three cases: (1) uncertainty in your liability for a tax debt, (2) uncertainty for the collectibility of the debt, (3) other exceptional cases/circumstances.
Uncertainty of your liability for the tax debt just means you don’t think you should be responsible for repayment. (or at least part of it). If this is the case, you would submit this form with your evidence.
When it comes to the collectibility of the debt, these are mainly cases when taxpayers are financially incapable of paying the tax bill in full. Basically, you are telling the IRS that it is impossible for you to pay. No questions asked! It has to be evident that you don’t even have assets to liquidate so that you can pay the taxes.
If your claim isn’t accepted, you can always negotiate some type of an installment plan with the IRS. But that would have been a separate agreement from Form 656.
How to File IRS Form 656
It’s important to note that you cannot e-file Form 656. So send all the paperwork to the IRS via mail! You may, however, complete all payments electronically. Still need more information on how to file IRS Form 656? All the information you need for the filing process is in the booklet here. The Form 656 booklet has all instructions you’ll need including required paperwork, fees, and the relevant delivery addresses.
Determining Your Payments
This is extremely important. There are two types of payment options that you can discuss with the IRS when filing Form 656. If you choose the lump-sum payment option, this would require that you pay 20% of your offer as an initial deposit. Then, there will be a payment plan of up to five months. As for a periodic payment arrangement, the taxpayer will get up to two years to pay the agreed-upon amount.
When & If You Get Accepted
You need to be aware of what you’re agreeing to when filing Form 656. Read through it carefully before signing and sending it. Once accepted, the terms in the form will be binding. If you should break any of the terms of the agreement, the IRS has the right to declare it null and void. The original amount that you owed before the agreement would then be reinstated.
How to Handle Tax Bills You Can’t Afford
Getting a tax bill that you can’t afford can be a dreadful experience, but there’s nothing to worry about because there are certain steps that you can take to solve the problem. Your best bet is to follow the steps above and complete form 656. Whatever you do, don’t do any of the below:
- Refusing to File Your Taxes: This can get you in serious trouble. You’ll have to pay a hefty fine. What can happen is you’ll have to pay a late fee at a monthly rate of 5% until 25% of the tax bill payment is complete. In addition, if the returns were actually filed but not paid, then there will be a late fee of 0.5% per month. Add interest in both cases and you’ll have a lot to worry about. It is possible to ask for an extension to file your taxes but that only gives you more time to file the forms, it doesn’t give you more time to pay.
- Letting Others Speak to IRS for You: Do not hire any individual or organization to negotiate with the IRS on your behalf. In most situations, you’re the best person to talk to the IRS because you have your best interests in mind. You should only appoint someone to speak to the IRS on your behalf, if you are in serious trouble and need professional assistance.
- Thinking Your 401(k) Can Help: No, it can’t and it’s best that you don’t use it either. When you take funds out of your 401(k) you’ll actually be adding more taxes that have to be paid, plus early withdrawal penalties.
- Using Credit Cards to Pay Tax Bills: You’ll regret this forever if you do that. Do not use cash advances or credit cards to pay your taxes. You’re setting yourself up for disaster if you do. The interest rate on cash advances can be 25% and for credit cards, it’s 16%. It’s best that you negotiate a payment plan of monthly installments with the IRS.