What Form 656-B Is For

Form 656-B (Offer in Compromise Booklet) is your pathway to settling tax debt with the IRS for less than what you owe. Think of it as a negotiation package—not just a single form, but a complete application booklet that helps you make your case for paying a reduced amount. The "B" indicates it's the booklet version specifically for individuals and businesses dealing with "doubt as to collectibility" (meaning you can't afford to pay the full amount) or "effective tax administration" (where paying would create extreme financial hardship).

The booklet contains everything you need: Form 656 (the actual offer form), Form 433-A (OIC) for individuals, Form 433-B (OIC) for businesses, detailed instructions, and worksheets to calculate your minimum offer amount. It's essentially asking the IRS: "I legitimately can't pay what I owe—will you accept this smaller amount instead?" IRS.gov

This is different from Form 656-L, which is for "doubt as to liability"—when you believe you don't actually owe the tax in the first place. Form 656-B assumes you owe the debt but simply cannot pay it in full.

When You’d Use Form 656-B (Including Late or Amended Situations)

You'd use Form 656-B when you've accumulated tax debt and meet specific eligibility criteria. Before applying, you must have:

• Filed all required tax returns (personal and business)
• Received at least one tax bill for the debt you're trying to compromise
• Made all estimated tax payments for the current year
• Made federal tax deposits for the current and past two quarters (if you're a business with employees)
• Not filed for bankruptcy (you cannot submit an offer while in bankruptcy proceedings)

You should consider an offer in compromise when traditional payment plans won't work for you. Perhaps you've lost your job, experienced a medical crisis, or your assets and income simply won't cover the debt within the IRS's collection period (generally 10 years). IRS.gov

Important timing note: If you have an open audit, pending innocent spouse claim, or deactivated Individual Taxpayer Identification Number (ITIN), resolve these issues first before submitting Form 656-B. The IRS cannot process your offer until these matters are settled.

There's no "late" or "amended" version of this form in the traditional sense—you submit it when you're ready to make an offer. However, if your offer is rejected, you can appeal within 30 days or submit a new offer with better documentation and a higher amount.

Key Rules You Need to Know

Understanding these fundamental rules can save you months of delays:

1. The $205 Application Fee and Initial Payment: Most applicants must submit a non-refundable $205 application fee plus an initial payment with their offer. Exception: Low-income taxpayers (based on adjusted gross income charts in the form) don't pay either until after acceptance.
2. Two Payment Options Shape Your Offer:
   • Lump Sum: Pay 20% upfront, then the remaining 80% within five months of acceptance. Your minimum offer = (Available Equity in Assets) + (12 × Monthly Disposable Income)
   • Periodic Payment: Make your first monthly payment upfront, continue monthly payments while the IRS reviews your offer, then complete payment within 6-24 months. Your minimum offer = (Available Equity in Assets) + (24 × Monthly Disposable Income) IRS.gov
3. Refunds Are Kept: The IRS will keep any tax refunds (including interest) for tax years through the date they accept your offer. These refunds offset your total tax debt but don't count toward your offer payment.
4. Five-Year Compliance Period: After acceptance, you must file all returns on time and pay all taxes in full for five years. One violation defaults the entire agreement, reinstating your original debt minus payments made, plus penalties and interest.
5. Financial Transparency Required: You must provide comprehensive financial documentation—bank statements, vehicle titles, property deeds, investment accounts, digital assets (like cryptocurrency), retirement accounts, life insurance policies, and more. The IRS uses national and local standards to evaluate what you actually need to live.
6. Penalties and Interest Keep Accruing: While your offer is under review, interest and penalties continue to accumulate on the original debt.

Step-by-Step (High Level)

Step 1: Pre-Qualify Yourself

Use the IRS Offer in Compromise Pre-Qualifier tool at IRS.gov/OICtool to determine if you're eligible and estimate a reasonable offer amount. This tool prevents wasting time and money on applications likely to be rejected.

Step 2: Gather Financial Documentation

Collect statements for all assets and income: bank accounts, investment accounts, digital assets, property deeds, vehicle titles, income statements (W-2s, 1099s, Schedule C), monthly expenses, and debt information. You'll need three months of bank statements and documentation for any asset worth over $500. IRS.gov

Step 3: Complete Form 433-A (OIC) and/or 433-B (OIC)

These Collection Information Statements are where you detail every aspect of your financial life. Form 433-A is for individuals and sole proprietors; Form 433-B is for corporations, partnerships, and LLCs. If you have both personal and business tax debt, you'll need both forms.

Step 4: Calculate Your Minimum Offer

Using the worksheets in the booklet, calculate your offer amount based on:

• Cash and investments (minus $1,000 allowance)
• Retirement accounts (80% of value minus loans)
• Real property (80% of market value minus mortgages)
• Vehicles (80% of value minus loans, minus $3,450 per vehicle for up to two)
• Other personal property (80% of value, minus $11,710 allowance)
• Business assets
• Plus your future income potential (monthly disposable income × 12 or 24)

Step 5: Complete Form 656

List all tax years and types of tax you're compromising. Enter your calculated offer amount (must be equal to or greater than the minimum calculated). Select your payment option and terms.

Step 6: Prepare Payment

Include separate checks for the $205 application fee and your initial payment (or check the low-income certification box if eligible). Make checks payable to "United States Treasury."

Step 7: Mail or Submit Online

Send your complete package to the address listed in the booklet's application checklist (differs based on location). Alternatively, file online through your Individual Online Account at IRS.gov. Keep copies of everything for your records. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Incomplete or Missing Documentation

The #1 reason for returned offers is missing bank statements, asset documentation, or proof of income. Solution: Use the application checklist on page 29 of Form 656-B and double-check every item before mailing.

Mistake #2: Math Errors on Form 433

Simple addition or subtraction mistakes on the Collection Information Statement lead to rejection. Solution: Use a calculator, double-check every calculation, and have someone else review your math.

Mistake #3: Offering Too Little

The IRS will reject offers below their calculated collectible amount unless you have special circumstances. Solution: Use the Pre-Qualifier tool and follow the calculation worksheets exactly. When in doubt, offer slightly more than the minimum.

Mistake #4: Failing to Stay Current During Review

Not filing current tax returns or making estimated payments during the 6-24 month review period results in automatic return of your offer without appeal rights. Solution: Set calendar reminders for all filing deadlines and estimated payment due dates. Treat these as non-negotiable while your offer is pending. IRS.gov

Mistake #5: Hiding Assets or Income

The IRS reviews offers for fraudulent intent. Omitting accounts, property, or income can result in civil or criminal penalties. Solution: Disclose everything. The IRS can access financial databases and will discover hidden assets.

Mistake #6: Submitting While Ineligible

Common ineligibility issues include open bankruptcy, unfiled tax returns, or missing estimated payments. Solution: Resolve all compliance issues before submitting. Wait until you've received at least one tax bill for the liability you're offering to compromise.

Mistake #7: Missing the 30-Day Appeal Deadline

If your offer is rejected and you don't appeal within 30 days using Form 13711, you lose your right to contest. Solution: Note the rejection letter date immediately and calendar the 30-day deadline.

What Happens After You File

Initial Processing (2-4 Weeks)

The IRS reviews your submission for completeness. If anything is missing or you're ineligible, they'll return your offer and application fee (but keep any payments already made, applying them to your debt).

Investigation Period (6-24 Months)

If processable, you'll receive a letter with an estimated contact date. An Offer Examiner or Offer Specialist will be assigned to investigate your case. They may request additional documentation—respond promptly within the timeframe specified or risk having your offer returned without appeal rights. IRS.gov

During Investigation

• Collection activities generally pause (though liens may be filed)
• Interest and penalties continue accruing on the original debt
• You must continue making periodic payments if you selected that option
• You don't have to make installment agreement payments if you had one
• Your legal collection period is extended
• Automatic acceptance rule: If the IRS doesn't make a determination within two years of receipt, your offer is automatically accepted

Three Possible Outcomes

Acceptance

You'll receive written confirmation. Complete your remaining payments according to your payment option. Federal tax liens won't be released until you've paid the full offer amount. Remember the five-year compliance requirement.

Rejection

You'll receive a letter explaining why. You have 30 days to appeal using Form 13711. If you don't appeal, you can request an installment agreement or submit a new offer with better documentation and a higher amount.

Return

Your offer was unprocessable (not the same as rejection). You can call the number on the return letter within 30 days to request reconsideration if you believe it was returned in error. IRS.gov

After Acceptance

Pay according to your terms, file all returns timely for five years, and pay all new tax debts in full. Violations cause the entire agreement to default, reinstating your original debt (minus payments made) plus penalties and interest.

FAQs

Q1: What are my actual chances of getting approved?

The IRS does accept offers when applicants demonstrate genuine financial hardship and submit complete, accurate documentation. Your chances improve significantly when you use the Pre-Qualifier tool first and offer at or above the IRS's calculated collectible amount. The IRS accepts thousands of offers each year from taxpayers who properly document their inability to pay the full amount owed.

Q2: Can I negotiate the offer amount with the IRS?

Yes, to an extent. If the IRS calculates that you can pay more than you offered, they'll give you an opportunity to increase your amount before rejecting the offer. You can also request a conference with the offer manager to discuss disagreements about asset valuations or allowable expenses. Fast Track Mediation is available for certain disputes during the investigation phase (but not after rejection). IRS.gov

Q3: What if my financial situation changes while the offer is pending?

You must inform the IRS of significant changes. If your situation improves (new job, inheritance, lottery winnings), this could affect your offer. If it worsens (job loss, medical emergency), provide updated documentation—it may help your case. The key is transparency.

Q4: Will the IRS still file a tax lien against me?

Possibly. The IRS may file a Notice of Federal Tax Lien during the offer process, though they typically wait until making a final decision. If your offer is accepted and you pay the full offer amount, the lien will be released. The IRS electronically releases liens to counties, taking anywhere from immediately (for cashier's checks) to 120 days (for credit cards). IRS.gov

Q5: Can I include my spouse's separate tax debt in my offer?

It depends. If you're compromising only joint tax debts, you can submit one Form 656. If you or your spouse also have separate tax debts (including Trust Fund Recovery Penalties), you'll each need to submit a separate Form 656 with separate application fees and payments. Your non-liable spouse's income must still be included in household income calculations for the Collection Information Statement.

Q6: What happens to my installment agreement if I submit an offer?

If you have an approved installment agreement, you don't have to make those payments while your offer is being reviewed. If your offer is rejected and you haven't incurred new tax debt, the IRS will reinstate your installment agreement at no additional cost. However, once your offer is accepted, you cannot enter into a new installment agreement for any subsequent tax debts during your five-year compliance period—new debts must be paid in full. IRS.gov

Q7: Can I use my retirement savings to fund my offer?

Yes, but carefully consider the consequences. Withdrawing from IRAs or 401(k) plans before age 59½ typically triggers ordinary income taxes and a 10% early withdrawal penalty, creating new tax debt. The IRS only counts 80% of retirement account values when calculating your minimum offer, recognizing these potential tax consequences. Consult a tax advisor before tapping retirement funds—you might create more problems than you solve.

Resources

• Form 656-B Booklet (PDF): IRS.gov/pub/irs-pdf/f656b.pdf
• Offer in Compromise Pre-Qualifier Tool: IRS.gov/OICtool
• Main OIC Page: IRS.gov/payments/offer-in-compromise
• OIC FAQs: IRS.gov/businesses/small-businesses-self-employed/offer-in-compromise-faqs