What Form 656 Is For
Form 656 2025 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 to determine if paying in full would create financial hardship or violate principles of effective tax administration.
The agency generally accepts an offer when there is doubt as to collectibility, meaning that income and assets cannot cover the full liability, or when there is doubt as to liability, when questions arise about the accuracy of the legal assessment, or the original tax debt. Exceptional circumstances may also apply when enforcing payment would cause severe financial strain.
Learn which tax relief and collection forms you need before applying.
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.
Eligibility Requirements
All tax returns must be filed, and required estimated tax payments must be up to date. Applicants cannot have an open bankruptcy proceeding or any unresolved civil or criminal penalties during the review process.
Who Can Apply
Individuals, self-employed workers, and business owners with limited resources may qualify. It also applies when a final court decision confirms a legally required tax amount that remains unpaid. For assistance, consider exploring tax relief services.
Key Rules or Details for the Offer in Compromise Program
Understanding the IRS filing requirements for an Offer in Compromise Form 656 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 tax returns must be filed appropriately and legally verified.
- Required estimated tax payments must be current for all tax periods.
- Employers must be up to date on federal payroll tax deposits for the current quarter and the two preceding quarters.
- Applicants cannot be involved in an open bankruptcy proceeding.
- Business taxes and self-employed income must be fully disclosed, accompanied by accurate supporting documentation.
- Taxpayers must remain compliant with future filing and tax payment requirements for a period of five years after acceptance.
Step-by-Step (High Level)
The Offer in Compromise Form 656 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 for your tax year.
- Step 2: Prepare Documentation: Collect all supporting documentation, including tax returns, pay records, and business information for every tax period included in your offer.
- Step 3: Complete and Submit Forms: Fill out Form 656 and the required Collection Information Statement, then include your application fee, initial payment, and written statement explaining exceptional circumstances.
- Step 4: Choose a Payment Method: Select either a lump sum or periodic payment option and mail your complete package to the IRS address listed in the Form 656-B Compromise Booklet.
Common Mistakes and How to Avoid Them
Submitting an Offer in Compromise Form 656 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 and learning how to avoid them ensures a smoother processing experience.
- Missing Documentation: You must 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.
- Incomplete Financial Records: You must review all entries in your Collection Information Statement to confirm that every asset and monthly payment is included.
- Unverified Tax Periods: Please verify that each individual and business tax period is accurately listed before submission.
- Noncompliance After Filing: You must keep all required estimated tax payments up to date to avoid IRS rejection during review.
What Happens After You File
After submitting your Offer in Compromise Form 656, 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 the IRS accepts your offer, follow all payment terms and stay compliant. If your application is rejected, you may appeal within 30 days of the date of rejection.
Frequently Asked Questions
What is the purpose of the Offer in Compromise Form 656?
The Offer in Compromise Form 656 allows qualified taxpayers to settle their original tax debt for less than the full amount owed. The IRS evaluates each compromise offer based on financial hardship, effective tax administration, and whether the tax liability can be collected within a reasonable period.
How much is the initial payment and application fee?
Applicants must include a $205 application fee and an initial payment with their correctly filed package. The first payment depends on whether the taxpayer selects a lump sum cash option or periodic payments under the chosen payment terms.
What happens after the IRS accepts an offer?
When the IRS accepts an offer in compromise, the taxpayer must follow all tax payment requirements for future tax years. Any missed tax return or required estimated tax payments can cancel the agreement and reinstate the full liability.
What if the IRS rejects my application?
If the IRS rejects your offer, you may appeal within 30 days using the process described in the Form 656-B Compromise Booklet. The IRS Independent Office of Appeals reviews the collection information statement and any written statement explaining exceptional circumstances.
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 preventing civil or criminal penalties during the review.
