Form 656 (2017): Offer in Compromise Checklist
Form 656 is the application form used in the Offer in Compromise program to resolve federal tax liabilities for less than the full amount owed. This checklist explains eligibility, documentation, and submission requirements in accordance with current IRS standards.
Understanding Offer in Compromise Eligibility
An Offer in Compromise allows eligible taxpayers to settle tax debt when full payment would create financial hardship or exceed reasonable collection potential. The IRS evaluates eligibility under IRC § 7122 using economic analysis, compliance history, and payment capability.
- Filing compliance: Taxpayers must file all required tax returns and address outstanding
tax obligations before submitting Form 656. The IRS will return incomplete applications when filing compliance requirements are not met.
- Bankruptcy status: Taxpayers cannot submit an Offer in Compromise application while
an active bankruptcy case exists under the Bankruptcy Abuse Prevention and Consumer
Protection Act. All tax liabilities must be resolved through the bankruptcy court during that period.
- Ability to pay: The IRS generally denies offers when tax debt can be paid through an
installment agreement or asset liquidation. Offers must demonstrate doubt as to collectability or verified financial hardship.
Financial Evaluation and IRS Review Standards
The IRS reviews every Offer in Compromise using a detailed financial assessment to determine reasonable collection potential. This analysis considers income, allowable expenses, assets, and future earning capacity.
- Reasonable collection potential: The total amount the IRS expects to collect from
assets and future income. Calculations are based on IRS allowable deduction standards and asset equity values.
- Interest and penalties continue to accrue while an offer is under review, even though
most collection actions are suspended. Accepted offers include all assessed interest and penalties unless otherwise stated.
- Federal tax lien considerations: The IRS may maintain a federal tax lien or Notice of
Federal Tax Lien during the review process. A lien release typically occurs only after full compliance with accepted offer terms.
Step-by-Step Offer in Compromise Application Process
Step 1: Confirm Filing and Payment Compliance
You must confirm that all required federal tax returns are filed and that estimated tax payments are current. The IRS will reject Form 656 applications submitted with unfiled returns or missing compliance obligations.
Step 2: Collect Financial and Tax Records
You must gather tax records, bank balances, pay statements, retirement account summaries, and documentation for real property and vehicles. Accurate records support the financial analysis used to calculate reasonable collection potential.
Step 3: Complete the Correct Collection Information Statement
Individual taxpayers must complete Form 433-A, while businesses must complete Form 433-B to disclose income, expenses, assets, and liabilities. These forms support the Offer in
Compromise application and financial assessment process.
Step 4: Calculate Asset Equity and Income Availability
You must calculate equity in assets such as Vehicle 1, Vehicle 2, real property, and a 401(k)
retirement account. Vehicle values should reflect Kelley Blue Book estimates and allowable exemptions.
Step 5: Select a Payment Option and Offer Amount
Your offer amount must meet or exceed reasonable collection potential and align with your selected payment method. Available options include lump-sum cash or periodic payment structures.
Step 6: Prepare a Written Statement Supporting Your Offer
You must explain why full payment is not possible and how financial hardship affects your ability to satisfy tax liabilities. Statements should reference changes in income, health, employment, or long-term earning capacity.
- Payment plan comparison: The IRS compares your IRS Offer in Compromise to a
- Impact on tax periods: All included tax periods must be clearly listed on Form 656-B or
- Income evaluation: The IRS reviews the gross income reported on Form 1040 and
- Asset valuation: Net realizable equity includes cash, funds, bank balances, and
- Levies and garnishments: The IRS generally suspends tax levies and garnishments
- Federal tax refund offsets: Under IRC § 6402, the IRS may apply a refund to
- Collection Appeal Program: Taxpayers may request review through the Collection
- Effective tax administration: Offers may be considered under effective tax
- Fraud penalty exposure: The IRS may deny offers involving fraud penalty assessments
- Penalty relief options: Penalties and interest may be reduced through separate
- Taxpayer Advocate Service: Taxpayers experiencing economic hardship or delayed
- Low-Income Taxpayer Clinic support: Eligible taxpayers may receive representation
- Ongoing filing obligations: All income tax returns must be filed on time while the offer
- Default consequences: Default may result in reinstated balances, penalties, interest,
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 7: Submit the Complete Offer Package
You must submit Form 656, Form 433-A, or Form 433-B, supporting documentation, and the required fee unless low-income certification applies. Incomplete application packages will be returned without appeal rights.
Payment Options and Ongoing Collection Status
After submitting Form 656, the Internal Revenue Service evaluates whether your proposed offer is preferable to other collection alternatives. Collection activities generally pause during review, but unpaid federal income taxes continue to accrue penalties and interest. payment plan or installment payment agreement using disposable income calculations.
Offers are rejected when projected payments exceed reasonable collection potential.
Form 656-A when applicable. Missing tax periods may cause the IRS to return the application without acknowledgment.
IRS Financial Review and Internal Standards
The IRS evaluates every offer using Internal Revenue Manual procedures and statutory authority under the Internal Revenue Code. Financial analysis focuses on net realizable equity, gross income, and allowable expenses. compares it with the income reported on the tax returns on file. Disposable income is calculated after allowable expenses, property taxes, and federal income taxes. property values reduced by secured debts. Equity calculations determine whether enforced collection would exceed the proposed offer.
Collection Actions During Offer Review
The IRS retains enforcement authority in limited circumstances, despite suspending most collection actions. These safeguards protect the government’s interest while the taxpayer’s account is under review. during review. Active enforcement may resume if the offer is returned or rejected. outstanding tax debt even while an offer is pending. Eligible taxpayers may request an offset-bypass refund due to economic hardship.
Appeals, Rejections, and Alternative Relief Options
Taxpayers have limited appeal rights if the IRS rejects an offer. Understanding these options helps protect funds and future compliance.
Appeal Program when collection actions resume. Appeals must be timely and supported by updated financial documentation. administration when collection would cause economic hardship despite the ability to pay.
This option is separate from doubts as to collectibility or liability.
Special Circumstances and Penalty Considerations
Certain factors increase IRS scrutiny or require additional documentation during review. These issues can affect acceptance or trigger enforcement. or refer cases for enforcement. Intentional misrepresentation on Form OIC-1 may invalidate the offer. abatement requests. Supporting documentation must align with Internal Revenue
Manual standards.
Taxpayer Rights and Assistance Resources
The IRS provides several support resources for taxpayers experiencing hardship or administrative delays. These options do not replace the offer process but may supplement it. acknowledgment of their tax returns may request assistance. The Taxpayer Advocate
Service can intervene when procedural errors occur. for income tax issues, levy disputes, or refund claims. Clinics often assist with EITC and
ACTC-related issues.
Compliance After Submission or Acceptance
Maintaining compliance is required throughout the review and post-acceptance period—noncompliance results in termination of relief. is pending and for five years after acceptance. Failure to comply reinstates full tax liabilities. and enforced collection actions, including a tax levy or a stipulation for judgment enforcement.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
