Form 656 (2019): Offer in Compromise Checklist
Form 656 allows taxpayers to resolve federal tax liabilities for less than the full balance when full payment is not feasible under applicable tax laws. The Offer in Compromise program administered by the Internal Revenue Service evaluates a taxpayer’s reasonable collection potential based on assets, income, and future income.
Understanding Offer in Compromise Eligibility
Before submitting Form 656, taxpayers must satisfy baseline compliance requirements established under the Internal Revenue Code and related revenue laws. All required tax returns for each tax period included in the offer must be filed, and any assessable penalty balances must already be assessed. Taxpayers must also be current with estimated tax payments or federal tax deposits when applicable.
Required Forms and Supporting Documentation
The IRS requires complete and accurate financial disclosures to evaluate collection potential and determine reasonable collection potential. These disclosures are reviewed alongside OIC
Financial Statements to assess assets, income, expenses, and future income.
- IRS Form 656: This form identifies the tax period, tax type, and proposed settlement
amount for the offer to compromise. The offer amount must meet or exceed the calculated reasonable collection potential.
- Form 656-B: This booklet provides official instructions, payment terms, user fee
requirements, and mailing guidance for submitting Forms 656 correctly. Taxpayers should review all instructions before submission.
- Financial Statement Forms: Individual taxpayers must submit Form 433-A (OIC), while
businesses must submit Form 433-B (OIC) to disclose assets, income-producing assets, liabilities, and dissipated assets.
- Authorization for Representation: Taxpayers working with a tax professional must
submit IRS Form 2848. Instructions for IRS Form 2848 explain how to grant valid authorization for representation.
Step-by-Step Offer in Compromise Submission Process
Step 1: Gather Financial Records
Collect documentation covering bank accounts, direct deposit records, income sources, debts, and real property holdings. Accurate records are required to prepare financial statements and determine reasonable collection potential.
Step 2: Prepare Financial Statement Forms
Complete Form 433-A or Form 433-B based on taxpayer classification. These forms calculate collection potential using income, allowable expenses, real estate, income-producing assets, and future income projections.
Step 3: Complete IRS Form 656
Complete IRS Form 656 by identifying each tax period and selecting appropriate payment terms. The proposed offer must align with the calculated collection potential and include any required additional amount.
Step 4: Include Application Fee and Initial Payment
Submit the required user fee and initial payment unless exempt. Payments are applied to tax liabilities if the offer to compromise is not accepted.
Step 5: Assemble Supporting Documentation
Attach all required financial statements, valuation documents for real estate as an asset in the
OIC valuation, and proof supporting dissipated asset disclosures. Do not submit original records.
- Lump Sum Cash Option: This option requires an initial payment equal to twenty
- Periodic Payment Option: This option allows monthly payments over 6 to 24 months.
- Trust Fund Recovery Penalty: Potentially responsible person determinations require
- Estate and Transfer Tax Matters: Estate tax return obligations such as Form 706,
- Foreign Income and Death Taxes: Taxpayers reporting foreign earned income under
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 6: Submit the Complete Application Package
Mail the completed package to the Memphis IRS Center listed in the Form 656-B instructions.
Electronic submission may be available through the IRS online systems for eligible users.
Payment Options and Payment Terms
Payment terms affect offer calculations and total required payments. Taxpayers must select one option on IRS Form 656 and comply strictly with the proposed payment schedules. percent of the total offer amount. The remaining payments must be made within five months of acceptance.
Payments must begin immediately and continue during the IRS review.
Asset Valuation and Disclosure Requirements
All assets must be disclosed at fair market value in accordance with IRS valuation standards.
This includes real property, income-producing assets, retirement accounts, and assets subject to dissipated assets review. The IRS considers these assets when calculating reasonable collection potential and determining whether the offer complies with revenue laws.
Special Asset and Tax Considerations
Certain tax situations require additional disclosures due to their complexity under federal tax laws. These disclosures ensure accurate evaluation and compliance with applicable Internal
Revenue Code provisions. disclosure of business roles, authority, and payment control. These liabilities must be addressed in the financial statements. generation-skipping transfer issues, qualified domestic trusts, and notification of distribution must be disclosed when applicable.
Section 911 or foreign death tax obligations must include supporting documentation.
Forms such as Form 673 may apply in limited circumstances.
IRS Review and Interview Process
The IRS may conduct a questionnaire interview during the offer review process. This interview verifies the accuracy of the financial statements, evaluates future income, and confirms disclosures related to real estate, income-producing assets, and dissipated assets. If litigation authority is required, the Department of Justice tax division may become involved in rare cases.
When Professional Assistance May Be Appropriate
Offers involving complex asset structures, estate tax issues, Trust Fund Recovery Penalty exposure, or Department of Justice considerations may benefit from professional review. A qualified tax professional can assist with authorization for representation and ensure compliance with applicable tax laws throughout the process.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
