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OFFER IN COMPROMISE |
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FORM 656
Read-Only |
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Offer
in Compromise
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What
is an
Offer in Compromise?
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An
Offer in Compromise (O/C) is an agreement between the taxpayer
and the government that settles a tax liability for payment of
less than the full amount owed.
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The
Service will generally accept an OIC when it is unlikely that
the tax liability can be collected in full and the amount
offered reasonably reflects collection potential. An OIC is a
legitimate alternative to declaring a case currently not
collectible or to a "protracted installment
agreement." The goal is to achieve collection of what is
potentially collectible at the earliest possible time and at the
least cost to the government.
Note:
A "protracted installment
agreement"
is defined as being one that extends beyond the period allowed
under IRS issued guidelines.
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The
success of the Offer in Compromise program will be assured only
if taxpayers make adequate compromise proposals consistent with
their ability to pay and the Service makes prompt and reasonable
decisions. Taxpayers are expected to provide reasonable
documentation to verify their ability to pay. The ultimate goal
is a compromise which is in the best interest of both the
taxpayer and the Service. Acceptance of an adequate offer will
also result in creating for the taxpayer an expectation of, and
a fresh start toward, compliance with all future filing and
payment requirements.
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Doubt as to Collectibility. Doubt exists that you could ever pay
the full amount of tax owed. Before the IRS can consider a doubt
as to collectibility offer (absent special circumstances), the
taxpayer must not be able to pay the taxes in full either by
liquidating assets or through current installment agreement
guidelines. You must submit the appropriate collection
information statement along with
all
required supporting documents.
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Doubt as to Liability. This means that doubt exists that the
assessed tax is correct. Do not use this reason if the sole
basis for filing an offer is because you are unable to pay the
tax liability. If you do not think that you owe the tax
liability, then you may submit an OIC for "Doubt as to
Liability" (see Item 6 on Form 656). You must submit a
detailed written statement explaining why you believe you do not
owe the tax that you want to compromise. You are not required to
submit a collection information statement if you are submitting
an offer on this basis alone.
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Effective Tax Administration (ETA). This means that the taxpayer
does not have any doubt that the tax is correct and there is no
doubt that the full amount of tax owed could be collected, but
an exceptional circumstance exists that would allow us to
consider your offer. To be eligible for compromise on this
basis, you must demonstrate that the collection of the tax would
create an economic hardship or would be unfair and inequitable.
If you are requesting an ETA offer, you must submit:
1. A
collection information statement
with
all appropriate attachments, and
2.
A written narrative explaining your special circumstances and
why paying the tax liability in full would create an economic
hardship or
would be unfair and inequitable.
You
must also attach appropriate documentation that will support
your request for an ETA offer such as proof of unusual expenses
that would cause you economic hardship if the taxes were
collected in full.
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The
information in this package is designed to assist you in
determining
if
an offer in compromise is the right payment option for you, as
well as guide you through the process of completing a complete
offer in compromise application package. Please read and follow
the directions carefully!
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What
We Need to Fully Evaluate Your Offer
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1.
COMPLETE AN ACCURATE
FORM
656 - Complete all applicable items on Form 656, which is the
official compromise agreement. You must sign Form 656. If
someone other than yourself prepared the offer package, then
please see the instructions in Step Four, Items 12 and 13, found
on Page 11 of this package. If your Form 656 was prepared by an
authorized Representative, you must include
a
completed Form 2848, Power
of
Attorney and Declaration of Representative, with your offer.
Detailed instructions for the completion of Form 656 are
found
on Pages 10 and 11 of
this
package.
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Common
errors to avoid in completing Form 656:
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The taxpayer's name is missing.
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The street address is missing or
incomplete.
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The social security number (SSN) or
employer identification number (EIN)
is missing, incomplete, or incorrect.
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The preprinted terms and conditions listed on the Form 656 have
been
altered or deleted.
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An offer amount or payment term
is missing.
. A required signature is missing.
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2.
COMPLETE AN ACCURATE COLLECTION INFORMATION STATEMENT (Form
433-A and/or Form 433-8) - You must provide financial
information when you submit offers based on doubt as to
collectibility and effective tax administration. We do not
require this information if your offer is based solely on doubt
as to liability. You must send us current information that
reflects your
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financial
situation for the three months immediately prior to the date you
submitted your offer in compromise. Collection information
statements must show all of your assets and income, even those
unavailable to
us
through direct collection action, because you can possibly use
them to fund your offer. The offer examiner needs this
information to evaluate your offer and may ask you to update it
or verify certain financial information. These forms must be
filled in completely. We may return offer packages that are
incomplete. Annotate items that do not apply to you with uN/A."
Provide all the information required to support your financial
condition. Required items of documentation are clearly indicated
on the collection information statements with icons.
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When
only one spouse has a tax liability but both have incomes, only
the spouse responsible for the tax debt is required to prepare
the necessary collection information statements.
The
responsible spouse should include only his/her assets and
liabilities on his/her collection information statements.
However, the income and expenses of the entire household is
required on their collection information statements. The entire
household includes spouse, domestic partner, significant other,
children, and others that contribute to the household. This is
necessary for the IRS to evaluate the income and expenses
allocable to the liable taxpayer.
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In
States with community property laws, we require collection
information statements from both spouses.
We
may also require financial information on the non-liable spouse,
or cohabitant(s), for offer verification purposes, even when
community property laws do not apply.
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Step
Three: Determining the Amount of
Your Offer
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Doubt
as to Collectibility
Your
offer amount must equal or
exceed
your reasonable collection potential amount. The information
provided
on the collection information statements (Form 433-A and Form
433-8) assists us in determining
the
reasonable collection potential (RCP) of your tax liability. The
RCP
equals the net equity of your assets plus the amount we could
collect from your future income.
If
our financial analysis indicates that you have the ability to
fully pay the tax liability, either immediately or through an
installment agreement, unless special circumstances are
involved, your offer will not be accepted. You must offer an
amount greater than or equal to
the
RCP amount. All offer amounts must exceed zero, including doubt
as to liability offers.
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If
special circumstances cause you to offer an amount less than the
RCP, you must complete Item 9, "Explanation of
Circumstances," on Form 656, explaining your situation. You
must also attach to Form 656 any supporting documents to help
support your special circumstances. Special circumstances may
include factors such as advanced age, serious illness from which
recovery is unlikely, or any other factors that impact upon
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your
ability to pay the total RCP and continue to provide for the
necessary living expenses for you and your family.
If
you are a wage earner or self-employed individual, completion of
the worksheet on Pages 8 and 9 will give you a good estimate of
what an acceptable offer amount may be. You will use the
information on your Form 433-A to complete the worksheet.
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Doubt
as to Liability
Complete
Item 9, "Explanation of
Circumstances,"
on Form 656, explaining why, in your judgment, you do not owe
the tax liability you want to compromise. Offer the correct tax,
penalty, and interest owed based on your judgment in Item 7 on
Form 656.
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Effective
Tax Administration (ETA)
Complete
Form 433-A or Form 433-8,
as
appropriate, and attach to Form 656. You must complete Item 9,
"Explanation of Circumstances," on Form 656,
explaining your exceptional circumstances and why requiring
payment of the tax liability in full would either create an
economic hardship or would be unfair and inequitable. You must
also
attach
to Form 656 any documents
to
help support your exceptional circumstances.
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Deferred
Payment Offer
This
payment plan requires you to pay
the
offer amount over the remaining statutory period for collecting
the tax.
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The
offer must include the realizable value of your assets plus the
amount we could collect through monthly payments during the
remaining life of the collection statute.
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Using the worksheet on Pages 8 and 9,
multiply
the amount from Item 12, Box 0, by the number of months
remaining on the collection statute. Add that amount to Item 11,
Box N, and use the total as the basis for your offer amount in
Item 7 of Form 656.
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You
can pay the deferred payment plan in three ways:
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Plan
One
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Full payment of the realizable value of
your
assets within 90 days from the date we accept your offer, and
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Your "future income" in monthly payments during the
remaining life of the collection statute
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Plan
Two
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Cash payment for a portion of the
realizable
value of your assets within 90 days from the date we accept your
offer, and
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Monthly payments during the remaining life of the collection
statute for both the balance of the realizable value and your
future income
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Plan
Three
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The entire offer amount in monthly
payments
over the life of the collection statute
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For
example, on a deferred payment offer with 7 years (84 months)
remaining on the statutory period for collection and a total
offer of $25,000, you might propose to pay your realizable value
of assets (e.g., $10,000) within 90 days and your future income
(e.g., $179
per
month for 7 years, or $15,000)
in
84 monthly installments of $179. Alternately, you could also pay
the same total $25,000 offer in 84 monthly installments of $298.
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Just
as with short-term deferred payment offers, we may file a Notice
of Federal Tax Lien on tax liabilities compromised under
Deferred Payment Offers.
Note:
The worksheet on Pages 8
and
9 instructs wage earners and self-employed individuals how to
figure the appropriate amount for a Cash, Short-Term Deferred
Payment, or Deferred Payment Offer.
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Offer
in Compromise Worksheet
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Please
see Pages 8 and 9.
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Funding
Your Offer
If
you do not have the cash to pay your
offer
amount immediately, you should begin the process of exploring
options to finance your offer amount. Options you may want to
consider include liquidating assets, obtaining a loan from a
lending institution, borrowing on your home equity through a
second mortgage or reverse mortgage, or borrowing funds from
family members or friends.
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11.
Add amounts in Boxes G through M to obtain your total equity and
assets
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12.
Enter amount from Item 34
Enter amount from Item 45 and subtract
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If
Box 0 is 0" or less, STOP. Use the amount from Box N and to
base your offer amount in Item 7 of Form 656. Your offer amount
must equal or exceed (*) the amount shown in BoxN.
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Net Difference
This amount would be available
to
pay monthly on your tax liability.
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13a.
If
you will pay the offer amount
in
90 days or less (i.e., cash offer):
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Enter
amount from Box N
Add
amounts in Box P and BoxQ
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13b.
If
you will pay the offer amount in more than 90 days but less than
2 years (i.e.,short-term deferred payment offer):
Enter
amount
from
Box 0 $
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Enter
amount from Box N
Add
amounts in Box Sand BoxT
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Use
the amount from Box U to base your offer amount in Item 7 of
Form 656.
Note:
Your offer amount must equal or exceed (*) the amount shown in
Box U.
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Use
the amount from Box R to base your offer amount in Item 7 of
Form 656.
Note:
Your offer amount must equal or exceed (*) the amount shown in
Box R.
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Note:
Do not compute your offer amount using 13a or 13b if your
statute expiration date(s) is less than 5 years from the date of
your offer. Instead, refer to page 7 under "Deferred
Payment Offer" options 1 through 3.
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*
Unless you are submitting an offer under effective tax
administration or doubt as to collectibility with special
circumstances considerations, as described on page 5.
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Effective
Tax Administration offers require you to complete a Form 433-A,
Collection Information Statement for Wage Earners and
Self-Employed Individuals, if you are an individual
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taxpayer,
or a Form 433-8, Collection Information Statement for
Businesses, if you are a corporation or other business taxpayer.
Complete Item 9, "Explanation of Circumstances."
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Enter
the total amount of your offer (see Page 5, "Determining
the Amount of Your Offer'J. Your offer amount cannot include a
refund we owe you or amounts you have already paid.
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Check
the appropriate payment box (cash, short-term deferred payment
or deferred payment - see Page 6, "Determine Your Payment
Terms'? and describe your payment plan in the spaces provided.
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It
is important that you understand the requirements listed in this
section. Pay particular attention to Items 8(d)
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and
8(g), as they address the future compliance provision and
refunds.
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Explain
your reason(s) for submitting your offer in the
"Explanation of Circumstances." You may attach
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additional
sheets if necessary. Include your name and SSN or EIN on all
attachments.
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Explain
where you will get the funds to pay the amount you are offering.
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11
(a) and 11 (b) Signature of Taxpayer. All persons submitting the
offer must sign and date Form 656. Include titles of
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authorized
corporate officers, executors, trustees, Powers of Attorney,
etc., where applicable.
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