Form 656 (2015): Offer in Compromise Checklist
Form 656 allows qualifying taxpayers to request a settlement of federal tax debt for less than the full balance owed. The Internal Revenue Service evaluates each application based on financial hardship, asset equity, income potential, and strict compliance with eligibility and filing requirements.
Understanding Offer in Compromise Eligibility
Before submitting Form 656, taxpayers must meet eligibility standards set by the Internal
Revenue Service. Applicants cannot be involved in an active Chapter 7 or Chapter 13 bankruptcy and must have filed all required federal tax returns. At least one assessed tax debt must exist for the IRS to evaluate an offer.
Step-by-Step Form 656 Submission Process
Step 1: Verify Your Eligibility Status
Confirm that all required federal tax returns have been filed and that no active bankruptcy, audit, or innocent spouse claim is pending. Business owners must also verify that current and recent payroll tax deposits are paid in full.
Step 2: Calculate Your Reasonable Collection Potential
Determine reasonable collection potential by reviewing asset equity and projected future income. The IRS evaluates net realizable equity using quick-sale values and compares disposable income with the National Standard expense allowances.
Step 3: Gather Required Financial Documentation
Collect recent federal tax returns, bank statements, asset ownership records, loan documents, and proof of income. Self-employed taxpayers must also provide complete business financial records supporting current income and asset valuations.
Step 4: Complete Form 656 and Required Financial Statements
Complete Form 656 accurately, identifying taxpayer information, applicable tax periods, and the proposed offer amount. Attach Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, based on the tax liability type.
Step 5: Determine Your Offer Amount and Payment Terms
Select either a lump sum or a periodic payment option based on financial ability. Lump sum offers require an upfront payment, while periodic offers involve monthly payments over an approved term.
Step 6: Submit the Application Fee and Initial Payment
Include the required 2015 application fee unless you qualify for a low-income waiver. Mail the complete application package and initial payment to the IRS address specified in the official
Form 656 instructions.
Step 7: Respond to IRS Requests for Additional Information
Reply promptly to IRS requests for clarification, updated documentation, or revised financial calculations. Failure to respond within the stated deadline may result in the IRS returning or rejecting the offer.
Step 8: Review the IRS Determination Letter
Carefully review the IRS determination letter explaining whether the offer was accepted, rejected, or returned. Compare the IRS calculations to your submitted information to identify possible errors or omissions.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 9: Accept, Appeal, or Withdraw the Offer
Accept an approved offer by signing and returning the agreement within the required timeframe.
If rejected, you may request Appeals consideration by filing Form 13711 within 30 days of the determination.
Key Information About Collection Activity
The IRS suspends the collection statute of limitations while reviewing an Offer in Compromise.
This suspension continues during the evaluation period, for 30 days after rejection, and throughout any appeals consideration. Taxpayers do not need to request this suspension separately.
Important Compliance Requirements
Taxpayers must remain fully compliant during and after the offer review period. This includes timely filing all required tax returns and making required estimated tax payments. Failure to
maintain compliance may result in the IRS returning the offer or defaulting on an accepted agreement.
Frequently Asked Questions
What happens if I submit Form 656 while missing tax returns?
The IRS will not process an Offer in Compromise if required tax returns are missing. All filing obligations must be satisfied before submission, or the IRS will return the application without consideration.
Can the IRS reject my offer even if I cannot afford to pay in full?
Yes, the IRS may reject an offer if it determines your reasonable collection potential exceeds the proposed amount. Asset equity, income projections, and allowable expenses directly influence this decision.
Does submitting Form 656 stop IRS collection actions?
Most collection activity is suspended while the offer is pending, but existing liens remain in place. The IRS may resume collection if the offer is returned, rejected, or if compliance requirements are not met.
How long does the Offer in Compromise review process take?
The IRS review process often takes six to twelve months, depending on case complexity and response times. Delays may occur if additional documentation or financial clarification is required.
What happens after my offer is accepted?
After acceptance, taxpayers must comply with all tax filing and payment requirements for five years. Failure to remain compliant can result in default, reinstatement of the original debt, and additional penalties.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
