IRS Offer In Compromise Forms and Supporting Documentation
An offer in compromise is when you make a lump sum cash payment to settle your tax liability for less than the full amount. Or in some cases, you can make tax payments over two years to settle your tax debt. To apply, you need to fill out a long offer in compromise application.
Wondering what forms you need to file to apply for an IRS Offer in Compromise? Here’s an OIC checklist and links to instructions for the most important Offer in Compromise forms.
IRS Form 656 is the form you use to apply for an OIC. Sometimes, this form is called 656-B. The B stands for "booklet", and the booklet also includes the 433 forms you need to apply for an OIC.
Use this form if you want to settle the tax for less than you owe because you can't afford to pay the entire tax debt. Also, use 656-B to apply for an OIC based on effective tax administration. That applies in situations where it would be unfair or unreasonable to hold you responsible for the whole tax bill, even if you could afford to pay it. If you are applying for an OIC because you doubt the tax liability is correct, use the next form.
If you are applying because you doubt part or all of your tax liability, you need to submit IRS Form 656-L. This form comes into play in situations where you have a legitimate doubt that you owe the full tax. With this type of OIC application, you don't need to include the 433 financial analysis forms.
IRS Form 433-A is an eight-page form known as the Collection Information Statement for Wage Earners and Self-Employed Individuals. It requires information on your income, assets, liabilities, and expenses. The IRS uses the information on this form to determine your Reasonable Collection Potential (RCP). The RCP is the sum of money the IRS believes you can pay in your current financial situation, and it dictates how much you should pay on your offer. Individuals and self-employed people including sole proprietors should use this form.
If your business is applying for an offer in compromise, you need to complete Form 433-B. This form is also known as the Collection Information Statement for Businesses. Consequently, it is for businesses applying for an OIC. Corporations, Partnerships, and single-member LLCs classified as a corporation should use this form. Once again, the IRS uses the information on this form to determine the total sum of money your business can pay. If you want to settle both business and personal taxes, you need to complete both Form 433-A (OIC) and 433-B (OIC).
Other Important Documentation Required for an OIC
In most cases, if you're applying for an offer in compromise because you can't afford to pay the full tax liability, you need to include supporting documentation. When you fill out the above forms, you provide the IRS with a lot of details about your finances, and you have to include documentation to support your claims.
Generally, you need to submit photocopies of the following documents over the last three months. These document types will also come in handy when completing the IRS offer in compromise forms above.
- Credit card statements
- Bank statements
- Car loan statements
- Statements from any other personal loans
- Investment statements
- Retirement account statements
- Health care bills
- Child care bills and receipts
- Proof of mortgage payments
- Documentation about housing expenses (leases, rental records, etc)
- Transportation costs
- Proof of other expenses (groceries, utility bills, etc)
- List of your assets and their values
- Appraisals of assets as necessary
- Copies of the required tax returns for the years related to the taxes owed
Also, don't forget to include the application fee. If you meet the low-income certification guidelines, you can skip paying the fee, but you must tick the low-income certification box on your form. Note that if you're applying for a lump sum payment, you also need to include a downpayment.
For best results when you apply for an offer in compromise, you should work with a tax professional. They will be able to help you thoroughly fill out the OIC forms. Then they can give you an OIC checklist to make sure that you include all the right supporting documents.
What If I Don't Include the Right OIC Forms With my Application?
If you don't include the right OIC forms when you apply, the IRS will return your application. Then, you will have to start over again. If your OIC application is missing any supporting documentation, the IRS will send you a request for the documents. You typically have 14 days to reply, and if you don't reply, the IRS will also return your application. To get the IRS to review your application, you need to include everything correctly.
It’s best to get a licensed tax professional to help you. A licensed tax professional can analyze your situation and determine if you're likely to qualify for an Offer In Compromise. If you are not likely to qualify, they can point you in another direction. Use TaxCure to search for tax professionals with offer in compromise experience.