IRS Form 656-L

Your Guide to IRS Form 656-L

An offer in compromise is a program through which the IRS lets taxpayers settle tax debt for less than they owe. Typically, taxpayers qualify for this program if they can’t afford to pay their tax bills, but there is also a type of offer in compromise known as doubt as to liability. This applies only in certain situations when you don’t agree with your tax bill from the IRS and have already tried other options to get your tax resolved. If you’re eligible, you should use IRS Form 656-L, Offer in Compromise Doubt as to Liability, to apply. 

So when would this option apply to you? Who qualifies? And how do you complete IRS Form 656-L? This guide breaks everything down so you understand how and when to use this form.

What is Doubt as to Liability?

Doubt as to liability applies when it’s not completely clear if your tax bill is accurate. The IRS may allow you to settle your debt for less if the doubt about your bill is legitimate. Doubt as to liability never applies to situations where you simply can’t pay your tax liability and are hoping for a settlement.

Who Qualifies for an OIC under Doubt as to Liability?

Taxpayers who doubt their tax liability, in whole or in part, and have legitimate reason to believe the bill is incorrect can send an offer in compromise under doubt as to liability. However, you don’t qualify for doubt as to liability in these situations:

• You’re in an open bankruptcy
• You owe restitution to the Department of Justice
• The IRS already accepted a doubt as liability or doubt as to collectability offer for the same tax year
• You made an election under IRC § 965(i) regarding the liability
• You have a deactivated Individual Tax Identification Number (ITIN)

Common examples that fall under the doubt as to liability filing include:

• The IRS made a mistake when evaluating tax law and taxes due
• An audit examiner didn’t consider valid evidence presented
• The assessment needs to be changed based on new evidence

The IRS also states that this option should only be used if you cannot dispute the tax liability the IRS says you owe within the period allotted by the IRS.

What Is IRS Form 656-L?

If you doubt your tax bill in full or in part, and that doubt is legitimate, your first step is completing IRS Form 656-L. Filing this form doesn’t automatically mean the IRS will accept the offer you send, but an agent will review your case and verify that the doubt is legitimate.

With Form 656-L, you also must send a written statement that explains your situation. You will outline which part of the debt is incorrect and provide proof that supports your doubt. The IRS also states, “If you are unable to reconstruct your books and records, you can provide an explanation that supports reasonable doubt justifying a reduction to a portion or all of your tax debt.”

The IRS won’t consider your offer if you don’t include a written statement with your tax form.

Doubt as to Liability vs. Doubt to Collectability vs. Effective Tax Administration

Doubt as to liability applies to cases where you don’t agree with the tax assessed. Another option is the doubt as to collectability offer, which applies when you agree with the taxes assessed, but you can’t afford to pay the full debt.

The IRS will consider a doubt as to collectability offer when you send in an offer to settle your debt along with detailed financial documents showing that your offer is the most you can afford to pay. They will approve it if they believe the offer is all they can reasonably expect to collect from you. Use Form 656, Offer in Compromise, to send in a doubt to collectability offer.

The third type of offer in compromise is called effective tax administration. This may apply when there is no doubt about the tax bill but paying it off would create an economic hardship or would be “unfair and inequitable because of exceptional circumstances.” Use Form 656, Offer in Compromise, for this type of offer as well.

How to Complete IRS Form 656-L

If you’re eligible to apply for an offer in compromise doubt as to liability, there are specific actions that will help you move forward with the process. Take these steps when filling out Form 656-L to send in your offer:

Provide Your Contact Information

Section 1 of Form 656-L asks for your basic information as an individual, such as name, Social Security number (SSN), ITIN, employer identification number (EIN), address, and your spouse’s name, if it’s a joint offer. Then, select the type of tax return you submitted and for which tax years. Section 2 asks for the same information but for businesses.

Provide an Offer

Section 3 of Form 656-L requires a monetary offer of at least $1. This amount is payable within 90 days following the IRS’s acceptance. The IRS won’t accept your offer if you don’t provide an amount of at least $1. Offer the amount that you believe you should owe the IRS instead of what they billed you.

Read the Terms

Section 4 lists out the terms, conditions, and legal agreement that apply to the arrangement, such as your responsibilities, right to appeal, and understanding of the IRS process. Read these terms carefully so you understand how it all works. Talk to a tax expert if you’re not sure what these terms mean.

Write Your Written Statement

Section 5 is where you’ll provide your written statement about why the tax is incorrect. Be as clear and specific as possible about what is inaccurate in the tax bill. This portion of your submission is very important and impacts the IRS’s decision. It’s always best to talk through your situation with a tax attorney so you can reference the tax code effectively in your offer.

Include Attachments

Provide any supporting documents that show the IRS your claim is correct. The IRS allows you to attach additional pages to the form, but remember to include this information on each sheet you add: name, SSN, EIN, and/or ITIN.

Sign the Form

Provide your signature in Section 6, and complete Sections 7 and 8, regarding your tax preparer, if applicable.

Don’t Include Payment

Don’t send in any money with your offer. Just include Form 656-L, your statement, and supporting documentation. Your offer reflects what you think your correct tax bill should be. Also note that for doubt as to liability offers, no application fee is necessary.

Mail Your Documents

Review the most recently updated Form 656-L instructions carefully, which provide the mailing address to send in your form and attached documents.

Appeal If Necessary

The IRS sometimes rejects offers in compromise. They’ll let you know through a mailed letter, which will explain why they’re rejecting it. Pay attention to this letter if you don’t agree with their rejection. It will provide the information you need to appeal the decision within 30 days of the letter’s date.

Correct Mistakes if the Offer Is Returned

In some cases, the IRS will send you back your offer without rejecting it because you’re missing information, filed for bankruptcy, or didn’t file your tax returns. This could also happen if you haven’t paid your current tax liabilities. Resolve any issues, and submit your request again if applicable.

Alternatives to Doubt as to Liability

Doubt as to liability doesn’t apply in very many cases. Sometimes, if your tax bill is incorrect, you are better off taking different actions such as amending your return. In cases where your tax bill is correct but you can’t afford to pay it, there are also other options you should explore. Consider the following: 

• Tax return amendment: If your tax bill is incorrect because you made a mistake on your return, you should first submit an amendment that corrects the error.
• Audit reconsideration: Sometimes mistakes happen on your tax liability after the IRS audits you. If this is the case, first ask for an audit reconsideration, wherein the IRS can take another look.
• Payment plan: The IRS allows taxpayers to pay off their bill over time. You can apply for either a short-term or long-term payment plan, depending on the size of your tax bill. You can usually submit this request online to get your installment agreement set up. 
• Offer in compromise doubt as to collectability: As mentioned above, this option is similar to doubt as to liability but is available if you agree with the tax but can’t afford to pay. The IRS will review your offer and your financial situation to decide whether to approve your request.
• Currently not collectible status: You could qualify for a temporary pause on collections. Let the IRS know that you’re experiencing a financial hardship, and they may agree to change your account status to currently not collectible. This means they won’t try to collect what you owe until your financial situation improves.
• Spouse relief: If you file jointly with your spouse, and they made an error on your tax return that you didn’t know about, you can apply for innocent spouse relief, which takes away your liability for what your spouse owes because of their error. Another form of relief, injured spouse relief, may apply if you used part of your refund to cover your spouse’s tax debts.

It’s not always easy to pursue these options on your own. Remember that you can work with a tax attorney or other tax professional who can help you make the right moves and get your issue resolved quickly.

Getting Help from W Tax Group

Exploring tax relief options and forms to send the IRS can be overwhelming. If your situation applies to the offer in compromise doubt as to liability option, you may have recourse and could get your debt settled for less. It all depends on the legitimacy of your doubt and the proof you provide to the IRS with Form 656-L.

Don’t try to go it alone. Work with the experienced tax attorneys at W Tax Group for assistance. We review your situation, help you understand all applicable tax laws, and put the right plan in place to address the issue through Form 656-L.

Contact W Tax Group to get started with a consultation.

FAQs about IRS Form 656-L

When should I use Form 656-L?

Form 656-L, Offer in Compromise Doubt as to Liability, is used when a taxpayer doubts their tax bill and wants the IRS to agree to settle for less.

How is Form 656-L different from a regular offer in compromise?

The offer in compromise doubt as to collectability option is for taxpayers who agree with the taxes owed but can’t afford to pay the bill in full. This offer is what the taxpayer can afford to pay, the IRS will accept if they see that this is all they can expect to collect.

What should my offer be on Form 656-L?

Your offer in compromise doubt as to liability should include the amount you believe is the correct tax you owe, not the amount the IRS billed you for that you doubt is correct. Your offer must be at least $1.

What if I can’t pay off my tax debt?

If you agree with your tax assessment from the IRS, you have tax relief options to apply for. Form 656-L would not be the route to take in this case. You will need to apply for an installment agreement, ask for a collections delay, or send an offer in compromise doubt as to collectability to try to pay off debt over time or settle your taxes.