Offer in Compromise Forms and Tips for Filing
The IRS requires that you submit both Form 656 and Form 433-A(OIC) to make your Offer in Compromise. There is a $186 filing fee that will be paid when you send in your offer. There is an option to have the fee waived if you qualify for a low-income certification. If you are married, you will need to file two offers and pay the filing fee for each offer sent in. Also, keep in mind you sign both forms under penalties of perjury that what you’ve included on the form is true and accurate.
Form 656 is where you state your actual offer of what you can pay. You will also choose an option as to when you will pay the offer to the IRS. You may pay your offer amount off in as little as five months or in up to 24 months. If you choose to pay your offer in five months or less, you will need to send at least 20% with your application. If you choose to pay your offer in six to 24 months, your first monthly installment will need to be paid with your application and each month after as your offer is being considered. Keep in mind that in most cases, if you choose the five-month option, the amount of your offer is typically less than if you want longer to pay it off. Depending on your ability to pay, you may want to get the offer paid off as soon as possible.
If you have exceptional circumstances that you want the IRS to consider, you will include that information on Form 656. Lastly, there are many questions that the IRS asks on this form, which you need to answer. Just a few of these questions include whether you have filed bankruptcy before, whether anyone is holding money for you, whether you are part of a lawsuit, etc.
Form 433-A (OIC)
The second form is the actual calculation of your Offer in Compromise – Form 433-A(OIC). This is where you provide all of the detail of your financial information. The form comes in two parts. The first part of this form is asking for your asset and liabilities. The IRS uses the value as if you had to sell your assets and uses a 20% discount to get to a “liquidation” value. You may also include any secured debt to offset the value of your assets. Secured debts are ones where the asset is used as collateral for the loan. Examples are your home mortgage and a car loan.
You will need to provide copies of your statements with your offer. You will need to include three months of your checking and savings account statements, as well as current statements for other investment and retirement accounts. Other documentation to support the amounts you used, both for assets and debts, are also required. You have the burden of showing the IRS that the amounts on your Offer in Compromise are accurate. Because it will take the IRS many months to get to your offer, you may be asked to provide updated statements. The IRS wants to be sure to get a current and accurate look at what you own at the time they consider your offer. It is very important to include all supporting statements. If you fail to do so, your offer may be rejected immediately as not complete.
The second part of the 433-A (OIC) form requests information on your sources of income and your expenses on a monthly basis. This may include your wages, social security income, business income, and your spouse’s income. Just like with your assets and debts, you will need to provide proof of your income by sending in paystubs, profit and loss statements from a business, etc.
You will also provide your monthly expenses. The IRS uses national standards to determine your reasonable monthly living expenses. These standards are adjusted every year and include costs for things like housing, food, clothing, transportation, etc. In our experience, this is a great opportunity to help our clients get the most out of their offer. Frequently, we see offers where people are not including all possible costs available to them. It is your burden to prove you have expenses that go over the national standards. Without that additional information, the IRS assumes you only spend the minimum. For example, the IRS allows $55 per month for out-of-pocket medical expenses. It is common for people to be spending far more than this. By supplying information that your actual out-of-pocket expenses are more than the $55 per month, you will be allowed the actual amount to reduce your offer amount. Other expenses that will be considered by the IRS may include court-ordered payments, like child support, bankruptcy payments, and minimum payments on credit cards (even if the debt can’t be included in your asset analysis).
The amount you have left over after taking your income less your expenses is the amount used to calculate your offer. If you are able to pay your offer off in five months or less, you will use that left-over amount and multiply it by 12. If you need up to 24 months to pay your offer, the left-over amount will be multiplied by 24. The result here is added to your net assets as calculated in the first part of this form. This is what you will offer.
When you have completed both the Form 656 and Form 433-A(OIC), send your offer, along with the filing fee and any required down payment to the IRS’ Offer in Compromise unit in Holtsville, NY. Then, you will need to be patient. It is not uncommon for the process on an accepted Offer in Compromise to take six months or more.
What happens after you submit an Offer in Compromise?
Once the IRS gets your application, it will send you a letter confirming it has received the offer and that it will be assigned to someone. The IRS has an initial review process to be sure your offer has the basic information completed correctly and that it meets the criteria for a valid offer. If you have missed something, the IRS will simply return the application to you with a letter explaining what was wrong. You will have only a certain amount of time to fix the problem.
If the Offer in Compromise gets past the initial review, it may take up to four months before a more in-depth review is taken of your request. Again, please be patient. While the offer is being considered, you should continue to pay any monthly payments if you chose that option. You should also stay current on any tax filing and payment requirements. Also, remember to pay special attention to any mailings you receive from the IRS. These will contain deadlines that you must abide by or your offer may be rejected.
If your offer is accepted, you will receive a letter from the IRS confirming its acceptance. You will be reminded that you need to remain compliant with all tax filings and payments for at least five years following the acceptance of your offer. If you fail to do this, the settlement will go away and all of the taxes and penalties will come back to you. In addition, for the year following your offer acceptance, any tax refunds you were to receive will go directly to the IRS. The refund will not be applied to your offer amount; it is simply kept by the IRS. You may want to work with a tax professional to adjust your tax withholdings to ensure you don’t have a large refund coming for that year.
The Offer in Compromise process can be overwhelming, time-consuming, and complex. If your situation is such where this would work for you, it can also be a great option to settle your tax debt and move on with your life.