IRS Form 656-L – Offer in Compromise Doubt as to Liability

Do you disagree with the tax amount the IRS assessed against you? You can dispute the assessment by submitting Form 656-L, Offer in Compromise (Doubt as to Liability), to the Internal Revenue Service (IRS). However, the requirements and procedure for filing this type of offer in compromise can be complex. Additionally, even if you disagree with your tax debt amount, your situation may require a course of action other than submitting Form 656-L to resolve the matter. In this post, we at the tax law firm of Timothy S. Hart Law Group, P.C., discuss doubt as to liability as a type of offer in compromise. We also outline the circumstances warranting this offer and explain how to submit Form 656-L. To get personalized help now, contact us today.

Offer in Compromise (OIC) – An Overview

An offer in compromise is a form of tax resolution and involves a settlement agreement between a taxpayer and the IRS. Under this agreement, the taxpayer does not pay the total amount they owe. The IRS will only accept this offer for a lower payment if any of the following grounds apply:

• Doubt as to liability: The taxpayer has a legitimate belief that the IRS’s tax assessment is incorrect. In other words, the taxpayer disputes the tax debt’s existence or amount.
• Doubt as to collectibility: The taxpayer agrees with the assessment but does not have the income or assets to cover the debt fully and before the collection period expires.
• Effective tax administration: Accepting the offer promotes the fairness and equity of tax collection due to exceptional circumstances. For example, suppose a taxpayer has a severe illness, and paying the tax debt will result in insufficient funds for medical care. In that case, the IRS may accept an OIC for effective tax administration.

This post focuses on the first basis for an offer in compromise, doubt as to liability, and how to submit this offer using Form 656-L.

Offer in Compromise for Doubt as to Liability

A genuine and legitimate disagreement on the existence or amount of an assessed tax constitutes doubt as to liability. If you believe you do not owe a tax debt in part or in full, you can complete and file Form 656-L Offer in Compromise (Doubt as to Liability). This form must explain why you dispute the tax and include your offer amount. If the IRS approves your offer, you must pay the amount within 90 days after receiving the notification of acceptance.

When To Submit an Offer in Compromise for Doubt as to Liability – Practical Examples

Generally, you can submit an OIC for doubt as to liability if a tax examiner has interpreted tax law incorrectly or ignored the evidence you presented. Doubt as to liability can also result from new evidence supporting a tax assessment change.

IRS Form 656-L – Submitting an OIC for Doubt as to Liability

Form 656-L consists of eight form fields, each requiring special attention. If you need help completing and submitting this offer, schedule a consultation with us at the tax law firm of Timothy S. Hart Law Group, P.C.

Section 1 – Individual Information (Form 1040 filers)

When completing the first section, you must provide all your information, including your name, Social Security Number, and address. If you are filing a joint offer, you must also provide your spouse’s details. Remember to include your Employer Identification Number if you are self-employed. Then, under the relevant returns, you need to list the tax periods to which the dispute applies.

Section 2 – Business Information (Form 1120, 940, 941, etc., filers)

If the doubt as to liability pertains to business taxes, you must complete section two of Form 656-L. Provide your business information and the business tax periods under the relevant returns:

• Form 1120 U.S. Corporate Income Tax Return
• Form 941 Employer’s Quarterly Federal Tax Return
• Form 940 Employer’s Annual Federal Unemployment (FUTA)Tax Return

If you submit an offer to dispute another type of federal tax debt, you can specify the type and period at the bottom of section two.

Section 3 – Amount of the Offer

Section three of Form 656-L provides a form field where you must enter the amount you offer. Note that your offer amount must be at least $1. If the IRS accepts your OIC for doubt as to liability, you will need to pay this amount within 90 days from acceptance.

Section 4 – Terms

Under section four, you will find a list of terms and conditions that apply upon submission of Form 656-L to the IRS. When signing Form 656-L, you agree that:

• You will voluntarily submit all payments you make on the offer.
• The IRS can keep all your payments and credits, including refunds, while the offer is under review.
• The IRS can file a bank levy or wage garnishment to collect the assessed tax until the agency accepts the offer for processing. The IRS can also keep the proceeds from such a levy.
• Should Form 656-L substantiate a lower tax debt and the IRS over-collected on your account, the IRS will return the excess amount it collected.
• The IRS can retain or release a continuous levy on your income or federal payments under sections 6331(e) or (h). However, while your offer is pending, the IRS can no longer file a levy against your account.
• Considering your offer will result in an extension of the statutory period of assessment by the duration the offer is pending. If the IRS returns, rejects, or terminates the offer, a one-year extension applies to the statutory period of assessment.
• Should you decide to waive the extension period, the IRS is not obligated to consider your offer. In this case, the assessment statute pauses while the offer is pending and for 30 days after the IRS rejects the offer.
• You will remain liable for the entire tax debt, including penalties and interest until you meet all the terms and conditions of the offer. Additionally, penalties and interest will continue accruing until you meet all payment terms of the offer.
• Once the IRS accepts the offer in writing, you no longer have the right to dispute the tax debt.
• Once the IRS rejects the offer, you have 30 days to appeal the rejection. You will waive this right if you fail to file an appeal within this period.
• Your offer will be automatically accepted unless the IRS rejects it in writing within 24 months of receiving it.
• If you do not follow the terms of this offer, the IRS can collect the amount you owe on the offer. The IRS can also collect the full original tax debt plus any extra fees and interest that have added up since the tax was first due, minus any payments you have made.
• While reviewing your offer, the IRS can file a Notice of Federal Tax Lien, a legal claim on your property. Once the IRS has verified your payment under the agreement, it will remove this claim within 35 days.
• The IRS may contact third parties while reviewing your offer.

Contact us at Timothy S. Hart Law Group, P.C., to learn more about these terms and how they apply to your unique situation.

Section 5 – Explanation of Circumstances

Section five is where you must substantiate your offer and explain why you believe the tax assessment is incorrect. Partner with a tax professional with insight into the tax code to ensure you complete this section correctly. If the form field does not provide sufficient room for your explanation, you can attach additional sheets and any documentation supporting your offer. Any additional sheets you include must contain your Employer Identification Number or Social Security Number.

Section 6 – Signature(s)

You and your spouse must sign the offer and authorize the IRS to contact you by phone and leave detailed voice messages. If you submit the form on behalf of a business entity, this section must contain the corporation name and your signature as an authorized corporate officer.

Section 7 – Application Prepared by Someone Other than the Taxpayer

If someone else prepared the offer on your behalf, enter their information in this section.

Section 8 – Paid Preparer Use Only

If you paid a tax professional to prepare the offer, they must provide their signature and CAF no. or PTIN. This section must also include your paid preparer’s firm name, address, and ZIP code. Note: If a tax professional will be representing you while the IRS reviews your offer, you must attach the following:

• Form 2848 (Power of Attorney and Declaration of Representative) or
• Form 8821 (Tax Information Authorization)
• Grounds for Non-Consideration of an OIC (Doubt as to Liability)

The court will not consider your offer in compromise for doubt as to liability if:

• A final court decision or judgment established the tax debt
• The tax debt is based on current law
• You are subject to an open bankruptcy proceeding
• The debt resulted from a restitution order
• The Department of Justice assumed jurisdiction over the collection action against you and initiated litigation
• The IRS already accepted an offer in compromise for the same tax year and debt

Tax Bill Disagreement- When Not To Submit Form 656-L

Depending on your situation, pursuing an offer in compromise for doubt as to liability may not be the correct course of action when disputing a tax debt. Conditions warranting an alternative resolution include:

• Incorrect items on your tax return: If your original tax return (like Form 1040 or 1120) contains errors, you must file an amended return (Form 1040-X or 1120-X) instead of Form 656-L.
• The IRS filed your tax return: If the IRS prepared and filed an incorrect substitute-for-return, submit your original tax return to the appropriate IRS center.
• Post-audit dispute: If you disagree with a tax debt after an audit, request an audit reconsideration.
• Penalty reduction or forgiveness: If you do not agree with a penalty or seek penalty relief, explore penalty abatement options rather than filing Form 656-L.
• Dispute on IRS adjustments for unreported income: Follow the steps in the IRS CP2000 notice if you disagree with adjustments for unreported income.
• Discrepancies in employment tax forms: Correct any errors in employment tax forms (like W-2, W-3, 941) if they don’t match Social Security Administration data.
• Affordable Care Act tax issues: If disputing taxes related to the Affordable Care Act, file an amended tax return (Form 1040-X), not Form 656-L.
• Worker classification issues (SS-8): If submitting an SS-8 for worker classification, follow the specific instructions for SS-8 resolution.
• Injured spouse claims: For Injured Spouse claims, complete and submit Form 8379 (Injured Spouse Allocation).

Frequently Asked Questions

I agree with the tax bill, but I do not have the assets or income to pay the debt in full. Should I dispute the liability?

No, if your income and net realizable equity in assets are insufficient to cover your tax debt, consider filing an offer in compromise for doubt as to collectibility.

Should I file Form 656-L if I disagree with the penalties on my bill?

If you incurred a penalty for the first time and have reasonable cause, file a penalty abatement request (Form 843) rather than Form 656-L.

Can I submit both types of OIC?

No, you can only submit one offer in compromise. The type you need to submit depends on your situation.

Seek Legal Help When Disputing a Tax Bill

Disputing a tax debt can be challenging and requires extensive insight into tax law and the IRS’s procedures. At the tax law firm of Timothy S. Hart Law Group, P.C., we can help you prepare and file Form 656-L and represent your interests during the review process. Please schedule a consultation with us today and explore your tax debt relief options.