Wilmington NC CPA discusses IRS Form 656, IRS Form 433-A and IRS Form 433-B | Offer in Compromise

An Offer in Compromise, submitted on Form 656, is the infamous “pennies on the dollar” technique for reducing the amount of money the IRS will accept, for back taxes, as payment in full.  The technique can be used for both companies and individuals.  Use IRS Form 656 or 656-L to submit the Offer in Compromise.  Use Form 433-A or Form 433-B to provide collection information to the IRS.

Does Form 656, Offer in Compromise, Really Work?

The answer is a qualified yes.  If it works, how well it works depends on your particular circumstances.  Sometimes your position can be better optimized with long range planning.  Most CPAs take a preliminary look at Form 656 with every back tax case.  Because, if it can be applied successfully, results can be dramatic.  The IRS clearly delineates what it will accept and it is usually obvious when folks don’t meet the Offer in Compromise requirements. 

Stricter Parameters now exist for Form 656, Offer in Compromise, Acceptance

Public outcry over the leniency of the Offer in Compromise guidelines in the past paved the way for stricter parameters today.  Obviously, the IRS doesn’t want to accept less than what they think your company owes in back taxes.  And they have great reduced the number of  Offers in Compromise accepted, via Form 656, despite the advertising seen on late night TV.  Here’s a post on these offer mills delineating governmental action against them.  In fact Roni Deutsch just surrendered her law license to California. 

Companies also file IRS Form 433-B, Collection Information Statement for Businesses, along with Form 656

Form 433-B just presents financial information about your company to help gauge collectability of back taxes.  Definitely read the IRS instructions before preparing it.  Both Form 656 and 433-B have pitfalls, despite the best intentions of the IRS.  These are complex issues which managers rarely encounter.  Don’t just rely on this posting as guidance.  Pay particular attention to allowable exemptions.

Individuals file IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, along with Form 656

The IRS is pretty thorough on 433-A, which gives them a good handle on how much they might actually collect from you.  Definitely read the IRS instructions. Sometimes your position can improve if there is enough time for planning.

Form 656, Offer in Compromise: Qualifications

So what are the IRS qualifications?  Three basic approaches exist.  Sometimes they can used simultaneously on Form 656-L, or be “bent” to some degree.

• Doubt as to collectability: The IRS may settle for an amount of back taxes that leaves you with zero net worth. This reflects the current, more stringent requirements for the IRS accepting Form 656. In the past, people paid “pennies on the dollar” and walked away with much of their wealth intact.
• Promoting Effective Tax Administration: Generally this approach uses financial hardship. This is different than insolvency (Form 982). Sometimes a CPA can make the case for exceptions IE raise the level of what constitutes financial hardship. Sometimes, like in case of grave medical circumstances, the IRS will settle so as not to be seen as heartless.
• Doubt as to Underlying Tax Liability: Sometimes this allows the CPA another chance to further argue your tax position without going to tax court. Sometimes the IRS will settle to avoid the cost of tax court.

Alternatives to Form 656, Offer in Compromise

• Installment agreement: Form 9465 may allow monthly payments to the IRS.
• Collateral Agreement: a customized agreement to pay more of the taxes you IF certain circumstances, like more earnings, occur in the future.  Use Form 2261.

Although we’re a CPA firm in Wilmington NC, we serve a broader geographical base.  Distance should not dissuade you from calling us for a free initial consult.  We advocate self preparation of tax forms when reasonable.  But Forms 656, 656-L, 433-A and 433-B all involve complex issues, and it may be prudent to seek help.  If so, we’d like you to call us at (910) 840-3858.  This post, and others on the site, should help you gauge our expertise and proactive philosophy.

So we’ve discussed that the Offer in Compromise technique can be effective IF you qualify.  And we’ve stated the guidelines for qualifying are well delineated.  So you should be aware of hucksters touting Form 656 as a universal cure for back taxes.  State governments have sucessfully shut down or won large awards against the offer mills seen on late night TV.  We’ve also discussed that if you qualify, the result depend on you particulars circumstances.  And that the IRS investigates those circumstances on Form 433-B, Form 433-A, Form 656 and/or Form 656-L.  Given adequate time, you may may be able to mold your circumstance before sumitting Form 656, Offer in Compromise.