You should know a good bargain when you see one! Have you ever been in a situation where the tax bills keep building, building, and building until it turns into the mother of all debts? If you’ve been there, you’re not alone. Many Americans are behind on debts, and tax bills top them all!
For this, we’d like to prescribe a little Form 656. Don’t worry it doesn’t require any doctor visits or anything. In fact, all you may need to do is sit with a tax agent to fill it out.
What does it do? Form 656 can work miracles for you.Filing this form will give you the opportunity to lower your debt to the IRS. Additionally, it will help arrange a payment plan based on the new negotiated figure (given the acceptance of your request). Take note that acceptance does not always happen. Your application may even end up “unprocessable” or rejected.
Form 656: A Deeper Look
Keeping up with taxes can be a real difficulty, especially if you have an unaffordable tax bill. Every year, many Americans face this challenge. What ends up happening is the tax bills get bigger due to the penalties and accumulated interest. Before you know it, it becomes impossible for you to pay.
Form 656 is what’s called an “offer in compromise” (OIC). Filing this form is a basic request to the IRS to lower the total tax debt. The whole basis of this request is that your financial situation does not allow you to pay the entire debt. If you are able to make a convincing case, the IRS may agree to it because it might be the only way to get anything out of you.
Who Should Be Filing the IRS Form 656?
Generally, there are three groups of people who really need to file IRS Form 656. They include (1) people who are uncertain that they are able to pay the bill, (2) taxpayers who have doubts about their responsibility for paying the bill, (3) miscellaneous cases.
Regarding the first case about affordability, the taxpayer must make a very strong case that he/she is in dire financial need. It must be evident without a shadow of a doubt that the figure requested by the IRS is impossible to afford in his/her current state. This also means that if the taxpayer were to sell his/her assets, he/she would still not be able to pay the tax bill in full.
As for the second case regarding responsibility, the taxpayer needs to build a case that a portion of the taxes in the IRS tax bill is not his/her responsibility. Thus, it’s important to write a statement on why he/she thinks so and provide evidence to support the claim. In the following sections, we’ll go into a bit more detail on how to file IRS Form 656.
Sending the Form to the IRS
You’ll need to physically send the form and all related paperwork to the IRS by mail. Unfortunately, there is no way to e-file the form to the IRS. It is, though, important to note that you may use electronic payments. You’ll find everything you need to know about sending the form from the Form 656 Booklet here.
The Payment Terms
Deciding what payment terms you want with the IRS is also very important. Basically, you have two options. The lump-sum payment option requires that you pay 20% of the agreed amount upfront. After that, you can pay the remaining amount over a period of 1-5 months. The other option is the period payment arrangement allows you a payment period of up to two years (minimum is six months).
What To Do with A Tax Bill You Can’t Afford
Now that you know how to file IRS Form 656, we’re going to discuss something even more important, which is how to handle tax bills you can’t afford. Don’t get stressed out when you get that horrifying tax bill! There’s the right way to deal with it and there’s the wrong way to deal with it. Too many times, people do things that they’re not supposed to be doing in stressful situations. Don’t be one of those people! We’re going to go through some of the deadliest tax sins you could commit when trying to handle an unaffordable tax bill.
- Deciding Not to File Your Taxes: You’re asking for trouble if you do this. It’s just going to take more money out of your pocket because you’ll get a terrible fine. You may have to pay a late fee of 5% per month to add up to 25% of your total tax bill. That’s if you didn’t file at all. But if you did file and didn’t pay, you’ll have to pay a late fee of 0.5% per month. Interest can make the situation worse in both cases. Requesting an extension for filing your taxes is definitely an option you should explore.
- Hiring a Representative to Speak on Your Behalf: In the vast majority of cases, hiring someone to negotiate with the IRS on your behalf is not required. You’re probably the best candidate for a job like this. However, you consider hiring a tax or legal professional if you’re in serious trouble with the IRS.
- Time to Take Out the 401(k): Stick your hands up and leave that 401(k) alone! First, never ever put your retirement funds at risk so that you can pay your taxes. That’s an important principle to keep in mind. Second, when withdrawing funds from your 401(k), you will actually have to pay taxes for those extra funds. That’ll happen even if you’re planning to use them to pay your taxes. So in the end, you’re just adding more taxes to your tax bill!
- Thinking Credit Cards are the Best Remedy: Credit cards can help you buy a lot of things. They can buy the latest album that you’d like to listen to, the latest sneakers in the market, and maybe even tickets to the NBA. But it’s best not to use them to pay your tax bill. You’ll be facing extremely high-interest rates of up to 16%. With cash advances, it’s a lot worse with the APR rate being up to 25%. So credit cards and cash advances are off-limits!