Form 656 (2018): Offer in Compromise Checklist
Form 656 allows taxpayers to settle federal tax debt for less than the full amount owed. The IRS evaluates each offer based on your reasonable collection potential, which includes asset equity and future income projections. Understanding current requirements helps ensure proper submission and improves the chances of acceptance.
Understanding Offer Eligibility Requirements
An Offer in Compromise settles tax debt when full payment through installment agreements or asset liquidation is not possible. Before submitting your offer, you must file all legally required tax returns, typically covering the past six years under IRS compliance policy. You must also have received at least one bill for the tax debt you wish to compromise and remain current on estimated tax payments.
Step-by-Step Process
Step 1: Verify Tax Return Filing Compliance
The IRS requires that all legally required federal tax returns be filed before accepting your offer for processing. Industry practice shows that the IRS typically expects the past six years of returns to demonstrate good-faith compliance with filing obligations. If your returns are missing, the IRS will return your offer, apply the initial payments to your outstanding tax debt, and remove your appeal rights.
Step 2: Complete Required Financial Statement Forms
Individual wage earners must submit Form 433-A OIC to document income, expenses, assets, and monthly household financial information. Business owners operating as corporations, partnerships, or limited liability companies must also complete Form 433-B OIC for business financial details. Both forms require supporting documentation, including recent bank statements, pay stubs, and asset valuations dated within three months of submission.
Step 3: Calculate Your Reasonable Collection Potential
Your offer amount must equal or exceed your reasonable collection potential, which combines asset equity with future income calculations. The IRS multiplies your monthly disposable income by 12 for lump-sum offers or 24 for periodic payment plans. Quick sale calculations reduce asset values by 20 percent, and specific allowances apply to bank accounts and vehicle equity.
- Lump-sum payment option: You must pay 20 percent of your total offer amount with
- Periodic payment option: You submit your first monthly payment with the application
Step 4: Determine Your Payment Option Structure
Two payment structures are available, depending on your financial capacity and preferred settlement timing. Your choice affects both the initial payment requirement and the multiplier used to calculate your minimum acceptable offer amount. the application and complete the remaining payments within five months of acceptance.
This option uses a 12-month income multiplier for calculating your reasonable collection potential and generally results in lower total settlement amounts. and continue monthly payments for 6 to 24 months after acceptance. This option uses a
24-month income multiplier and requires continued payments during the IRS evaluation, or your offer will be returned without appeal rights.
Step 5: Prepare Application Fee and Initial Payment
The standard application fee is $205, unless you qualify for low-income certification under federal poverty guidelines. Individual taxpayers meeting low-income requirements submit no application fee or initial payments during the evaluation period and begin payments 30 days after acceptance. Make all payments by check or money order, payable to the United States
Treasury, with separate payments for fees and offer amounts.
Step 6: Attach Supporting Financial Documentation
Include copies of all required documents listed on Forms 433-A OIC and 433-B OIC without sending original documents. Recent financial statements, asset valuations, income verification, and debt documentation must be current within the three-month window preceding submission.
Incomplete documentation results in processing delays or offer returns requiring complete resubmission with corrected information and updated financial disclosures.
Step 7: Complete Form 656 With Tax Liability Details
Form 656 identifies specific tax years, tax types, your proposed offer amount, and selected payment terms for settlement. If you are married and have both joint and separate tax debts, each spouse must submit a separate Form 656. Individual and business tax debts also require separate Form 656 submissions, each with its application fee and initial payment, unless low-income certification applies.
Step 8: Include Power of Attorney Documentation
Form 2848 must accompany your offer if an authorized representative signs Form 656 on your behalf without your signature. The representative must be eligible to practice before the IRS, and the form requires original wet-ink signatures from both parties. Notarization is not required for Form 2848, contrary to common misconceptions about representative authorization for tax matters.
Step 9: Understand Collection Activity During Evaluation
When you submit a processable offer that is under active consideration, the IRS automatically suspends most enforcement collection actions. Penalties and interest continue accruing on unpaid balances throughout the evaluation period, regardless of suspension status for other collection activities. The IRS may still file a Notice of Federal Tax Lien to establish priority against other creditors even while your offer remains pending.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Mail Your Complete Application Package
Send your completed Form 656, financial statements, supporting documentation, application fee, and initial payment to the appropriate IRS processing center. Individual taxpayers may also submit offers through electronic filing with digital payment options for fees and deposits. Keep complete copies of your entire application package for your records before mailing to document submission dates and contents.
Maintaining Compliance After Offer Acceptance
You must timely file all required tax returns and pay all tax obligations for the five years following the acceptance of the offer. Failure to meet these ongoing compliance requirements results in offer default, reinstating your original tax debt minus payments made, plus accumulated interest and penalties. The IRS will not refund excess payments but will apply any overpayments to reduce your outstanding tax liability balance.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
