An offer in compromise (IRS Form 656) is not a way to settle a federal tax debt for a fraction of the original tax bill, as a rumor circulating throughout the Internet stated. Instead, it is defined as a way to negotiate a settlement of a federal tax debt with the Internal Revenue Service (IRS). However, there are stipulations. Only certain taxpayers with special circumstances are eligible to file a Form 656. Those special circumstances are limited to:

--        inability or reasonable doubt that the taxpayer has the resources available to pay the debt,

--        a mistake in the tax debt or court ruling on the debt,

--        if the taxpayer has the resources to pay, but doing so will create an “economic hardship,” or

--        the debt is accurate, but believed to be unfair.

Only one of these requirements is needed to qualify a taxpayer for an offer in compromise. Without at least one of these qualifications, the Form 656 request will be denied.

Any taxpayer that believes he or she is eligible for this service should request a Form 656 from the IRS. You can download a copy of the form and its instructions from the IRS Web site at www.irs.gov/businesses/small/article/0,,id=180960,00.html. After filling out the form, check the appropriate box under reason for filing. Then, determine the type of payment schedule. An offer in compromise allows the taxpayer to settle their debt by:

--        a one time, full payment of the settlement amount,

--        periodic payments made within 24 months of the application date, or

--        periodic payments made within a collection period for the tax debt.

No matter what payment type you choose, an initial payment must be sent in with your application. With the periodic payments schedule, those payments must be made while the offer in compromise is being investigated.

You must also include two narratives, one outlining the circumstances behind your request for a settlement and another outlining where the money will come from in order to pay the debt. Send all of this information in, with the application fee. Taxpayers who cannot pay the fee (usually over $100) can apply for a waiver by contacting the IRS. They will investigate the application and send a decision to you. Note that you do have the right to appeal a decision to deny your application.