What Form 656 Is For
Form 656 is the official application for an offer in compromise, which allows eligible taxpayers to settle tax debt for less than the full amount owed. The IRS reviews each application carefully, considering the applicant's ability to pay, income, expenses, and asset equity. The agency generally accepts an offer when paying in full would create financial hardship or is otherwise not feasible given the taxpayer's financial situation.
When You'd Use Form 656
Form 656 applies when taxpayers face genuine financial hardship and are unable to pay their full tax debt. Filing helps demonstrate a willingness to resolve what is owed while meeting IRS filing requirements. If you have unresolved, unfiled tax returns, those must be addressed before your application can proceed.
Eligibility Requirements
All required tax returns must be filed before applying. If you are applying for the current tax year and have a valid filing extension, that extension satisfies the return requirement for that year. Required estimated tax payments must also be current. Applicants cannot have an open bankruptcy proceeding during the review process.
Who Can Apply
Individuals, self-employed workers, and business owners with limited resources may qualify. For assistance, consider exploring our tax relief services.
Key Rules or Details for the Offer in Compromise Program
Understanding the IRS filing requirements for an offer in compromise ensures compliance and helps prevent processing delays. Each rule supports fair tax administration and confirms whether the taxpayer qualifies for debt settlement consideration.
Filing Requirements
- All required tax returns — must be filed before submitting your application. A valid extension for the current year satisfies this condition if you are applying for that year.
- Required estimated tax payments — must be current for all applicable tax periods.
- Federal payroll tax deposits — employers must be up to date on deposits for the current quarter and the two preceding quarters. This also applies to payroll tax obligations for business filers.
- Open bankruptcy — applicants cannot be involved in an open bankruptcy proceeding.
- Business and self-employment income — must be fully disclosed with accurate supporting documentation.
- Future compliance — taxpayers must remain compliant with all filing and tax payment requirements for five years following acceptance.
Step-by-Step (High Level)
The offer in compromise process requires careful preparation to ensure your submission meets all IRS standards. Following these steps helps you stay organized and improves your chances of proper evaluation.
Step 1: Verify Eligibility — Use the IRS Offer in Compromise Pre-Qualifier Tool to confirm you meet the filing and financial hardship criteria. You can also use our IRS Offer in Compromise pre-qualification calculator to get started.
Step 2: Prepare Documentation — Collect all supporting documentation, including tax returns, pay records, and business information for every tax period included in your offer. Reviewing your IRS transcripts beforehand can help confirm which periods are outstanding.
Step 3: Complete and Submit Forms — Fill out Form 656 and the required Collection Information Statement, then include your application fee and initial payment. Note that applicants who meet the IRS low income certification guidelines are not required to submit the application fee or initial payment.
Step 4: Choose a Payment Method and Submit — Select either a lump sum or periodic payment option. You may submit your complete package by mail to the IRS address listed in the Form 656-B Compromise Booklet, by email to one of the IRS-designated submission sites, or online through your Individual Online Account.
Common Mistakes and How to Avoid Them
Submitting an offer in compromise requires precision, honesty, and strict compliance with all IRS guidelines. Many taxpayers make preventable errors that can delay approval or result in rejection. Recognizing these mistakes helps ensure a smoother processing experience.
- Missing Documentation — Provide complete supporting documentation, including tax returns and financial statements, to validate income, assets, and liabilities.
- Incorrect Payment Amounts — Verify that your application fee and initial payment match the amounts listed in the Form 656-B Compromise Booklet. Low income certified applicants are exempt from these requirements.
- Incomplete Financial Records — Review all entries in your Collection Information Statement to confirm that every asset and monthly expense is included.
- Unverified Tax Periods — Confirm that each tax period is accurately listed before submission.
- Noncompliance After Filing — Keep all required estimated tax payments current to avoid IRS rejection during review.
What Happens After You File
After submitting your offer in compromise, the IRS conducts an initial review to confirm all filing requirements are met. Missing documents, incomplete forms, or unpaid application fees may result in an automatic return without review.
Once your application is accepted for processing, it will undergo a thorough evaluation. During this stage, the IRS reviews your income, expenses, and assets for all tax periods to determine eligibility based on financial hardship. The agency may request additional information before issuing a final decision. If you have received an IRS notice of intent to levy while your application is pending, it is important to act quickly and notify the IRS of your filed offer.
If the IRS accepts your offer, follow all payment terms and remain compliant with all future filing and payment obligations. If your application is rejected, you may appeal within 30 days of the rejection date by filing Form 13711 with the IRS Independent Office of Appeals. Learn more about your options through our rejected offer in compromise services.
Frequently Asked Questions
What is the purpose of the Offer in Compromise Form 656?
Form 656 allows qualified taxpayers to settle their tax debt for less than the full amount owed. The IRS evaluates each application based on the taxpayer's ability to pay, income, expenses, and asset equity to determine whether full collection is feasible or would cause financial hardship. This applies to federal tax debt as well as certain state tax situations.
How much is the initial payment and application fee?
Applicants are generally required to include a $205 application fee and an initial payment with their submission package. The initial payment amount depends on whether the taxpayer selects a lump sum cash option or periodic payments. Applicants who qualify under the IRS low-income certification guidelines are exempt from both the application fee and the initial payment requirement.
What happens after the IRS accepts an offer?
When the IRS accepts an offer in compromise, the taxpayer must comply with all offer terms, including filing required returns and making all required tax payments for five years following acceptance. Failing to meet these obligations can jeopardize the agreement. If you are also managing state payroll tax problems, those should be addressed separately to avoid compliance issues.
What if the IRS rejects my application?
If the IRS rejects your offer, you may appeal within 30 days using Form 13711. The IRS Independent Office of Appeals will review your case and can provide additional assistance in resolving your tax debt. Taxpayers with significant IRS tax debt should also be aware that outstanding balances can affect passport eligibility.
Should I hire a tax professional or a paid preparer to help?
Hiring a qualified tax professional or paid preparer can ensure your Form 656 is accurately completed and meets all filing requirements. They can also assist in organizing supporting documentation, verifying business information, and navigating the review process. This is especially important for payroll tax offers in compromise cases or situations involving IRS audit representation.