IRS Offer in Compromise Guide: Using Form 656 (2016)

Form 656 allows taxpayers to settle federal tax debt for less than the full amount owed. This checklist guides you through the application process using accurate requirements based on official IRS guidance and current collection standards.

Understanding Offer in Compromise Eligibility

The IRS generally requires that you have filed all required tax returns before considering your offer application. The IRS typically requires the filing of the last 6 years' tax returns as part of its internal administrative policy to establish compliance. If you run a business with employees, you also need to keep up with your estimated tax payments for the current year and federal tax deposits.

Step-by-Step Application Process

1. Step 1: Verify Filing Compliance and Obtain Account Transcript

   Request your account transcript from the IRS using Form 4506-C to review all assessments, payments, penalties, and interest. This transcript provides the complete picture of your tax liability and ensures you have accurate information before calculating your offer amount.

2. Step 2: Calculate Net Realizable Equity in Assets

   List all assets, including real property, vehicles, bank accounts, and retirement accounts, at their quick sale value. The IRS uses quick sale value, which is typically 80 percent of fair market value, minus any loan balances, to determine your net realizable equity in each asset.

3. Step 3: Determine Monthly Disposable Income Using IRS Standards

   Complete the income and expense analysis using IRS Collection Financial Standards, including national standards and local standards. Your monthly disposable income equals your total monthly income minus allowable living expenses as defined by these standards, excluding discretionary expenses such as entertainment or vacation costs.

• Lump sum payment option: Your net realizable equity in assets plus 12 months of
• Periodic payment option: Your net realizable equity in assets plus 24 months of

4. Step 4: Apply the Correct Reasonable Collection Potential Formula

   Calculate your minimum offer amount using the appropriate formula based on your chosen payment method: monthly disposable income equals your minimum acceptable offer amount. This payment option requires you to pay the entire offer amount within 5 months of the IRS's acceptance. monthly disposable income equals your minimum acceptable offer amount. This option allows you to pay your offer amount in six to 24 monthly installments after the IRS accepts your proposal.

5. Step 5: Select Payment Terms and Calculate Required Initial Payment

   Choose between lump sum or periodic payment terms based on your financial capacity and ability to pay. For lump-sum offers, you must include 20 percent of the total offer amount as a nonrefundable initial payment with your application. For periodic payment offers, you must include your first monthly payment amount with the application and continue making monthly payments while the IRS evaluates your offer.

6. Step 6: Complete Form 656 and Required Financial Statements

   Fill out Form 656 with complete information, including your identification, reason for the offer, and payment terms. Attach Form 433-A for individuals or Form 433-B for businesses, providing detailed information about all income sources, monthly expenses, asset values, and outstanding debts, including mortgages and credit card balances.

7. Step 7: Gather Supporting Documentation for Financial Disclosure

   Collect recent pay stubs, bank statements from the past two to three months, and profit and loss statements if self-employed. These documents verify the financial information you report on

   Form 433-A or Form 433-B and support your claim regarding your ability to pay the full tax liability.

8. Step 8: Include Application Fee and Check Low-Income Certification

   The application fee is $205 unless you qualify for low-income certification based on household size and gross monthly income. If your household's gross monthly income falls at or below the

   IRS low-income guidelines, you are exempt from the application fee and from making payments during the offer evaluation period.

9. Step 9: Submit Complete Application Package to Correct IRS Address

   Assemble your complete offer package, including Form 656, financial statement forms, supporting documents, application fee check, and initial payment check. Mail your application to

   the appropriate IRS address based on your state of residence, as specified in the current Form

   656-B booklet instructions.

• Full IRS transcript retrieval (Wage & Income + Account)
• Professional tax form review
• Preparation & filing support
• Tax relief options if you owe the IRS

10. Step 10: Maintain Compliance During Evaluation and After Acceptance

    Continue making periodic payments if required and remain current with all new tax filing and payment obligations during the evaluation period. If your offer is accepted, you must remain in full compliance with all tax filing and payment requirements for five years from the acceptance date, or the IRS may revoke the agreement and pursue collection of the original tax debt plus accrued penalties and interest.

    Important Considerations for Offer Applications

    The IRS may file a Notice of Federal Tax Lien during offer consideration to protect government interests. Any tax refunds you receive during the calendar year the IRS accepts your offer will be retained and applied to your original tax debt, not toward your accepted offer amount. If you have an existing installment agreement, you do not need to continue making those payments while your offer is under consideration by the IRS.

    If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.