Form 656 (2020): Offer in Compromise Checklist
Form 656 is the Internal Revenue Service application used to request participation in the Offer in Compromise Program. This tax resolution option allows qualifying taxpayers to settle their federal tax liability for less than the full amount owed under applicable tax and revenue laws.
Understanding Offer in Compromise Eligibility
The Internal Revenue Service only accepts an Offer in Compromise Application when specific compliance conditions are met. You must file all required tax returns for the applicable tax periods, remain current with estimated payments, and not be in an active bankruptcy proceeding governed by internal revenue laws.
Eligibility is evaluated under three legal bases recognized by the Internal Revenue Code, including Doubt as to Collectibility, Doubt as to Liability, and effective tax administration. Each basis is assessed under tax administration standards and public policy considerations.
Legal Bases for Offer in Compromise Consideration
- Doubt as to Collectibility: This basis applies when your reasonable collection potential
is less than the total tax liability after reviewing income, assets, dissipated assets, and income-producing assets. The IRS evaluates your ability to pay through Collection
Information Statement analysis.
- Effective tax administration: This basis applies when collection would cause economic
hardship or be unfair under public policy, even if the liability is legally owed. The IRS considers national standard expense limits, transportation expenses, retirement plans, and necessary living costs.
- Doubt as to liability: This basis applies when a legitimate dispute exists over the
overcorrectness of the assessed tax under the Internal Revenue Code. Supporting documentation must clearly demonstrate why the estimated liability is incorrect.
Determining Your Offer Amount
The Internal Revenue Service calculates your offer amount using reasonable collection potential, which includes net equity in real estate, real property, accounts receivable, and other income-producing assets. Asset values are generally calculated using the quick sale value, which reflects reduced marketability.
Future income is calculated using allowable monthly income minus National Standard Expense allowances over a defined payment period. Additional amount adjustments may apply when dissipated assets or assessable penalty considerations exist.
Step-by-Step Offer in Compromise Application Process
Step 1: Verify Tax Compliance Status
Confirm that all required federal tax returns are filed for all applicable tax periods and that at least one IRS billing notice has been issued. The Internal Revenue Service will return incomplete applications without review.
Step 2: Confirm Bankruptcy and Criminal Status
Verify that you are not involved in an open bankruptcy case or under criminal liability investigation related to tax administration. Active civil or criminal case proceedings prevent offering consideration.
Step 3: Complete Required Financial Statements
Prepare Form 433-OIC to disclose assets, income, expenses, bank and credit card statements, and Social Security information. Businesses must also report going concern value and accounts receivable details.
Step 4: Calculate Asset Equity Accurately
List all assets using quick sale value for real estate, real property, retirement plans, and income-producing assets. Subtract secured debt to determine net realizable equity under IRS revenue officer review standards.
Step 5: Select Payment Terms
Choose between a lump-sum payment and monthly installments based on your payment plan selection. Periodic payment offers require continued monthly payments during IRS review.
Step 6: Assemble Supporting Documentation
Collect bank and credit card statements, proof of income, expense verification, and documentation supporting dissipated assets or retired debt claims. Incomplete documentation may trigger additional collection actions.
Step 7: Complete Form 656 Accurately
Complete IRS Form 656 by listing each tax period, liability type, and offered amount. Ensure the taxpayer’s name and taxpayer identification number match IRS records exactly.
Step 8: Attach Required Forms and Addenda
Include Form 656-B, Form 656-L if applicable, and any required addendum to Form 656. Refer to the Form 656 Booklet, Offer in Compromise, for current submission requirements.
Step 9: Submit User Fee and Initial Payment
Include the required user fee and the initial payment unless you qualify for a waiver. Payments may be submitted electronically or by check payable to the United States Treasury.
- Eligibility compliance: You must remain current with all filing and payment obligations
- Financial transparency: You must fully disclose all assets, income, and expenses using
- Ongoing compliance: You must comply with all tax obligations for five years following
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Review, Sign, and Submit Application
Sign and date all IRS forms, including Schedule B-1 if required, and submit the full package as instructed. Incomplete signatures delay processing and may result in rejection.
During the IRS Review and Evaluation
During review, the Internal Revenue Service applies all payments to the outstanding liability and continues accruing interest and penalties. Collection actions are suspended, but a federal tax lien may remain in place until the matter is resolved.
An IRS Revenue Officer evaluates financial accuracy, asset valuation, and compliance with tax laws. If accepted, you will receive an IRS OIC Acceptance Letter outlining payment obligations and future compliance requirements.
Appeals, Rejections, and Post-Decision Rights
If the offer is rejected, you may submit an appeal request within the allowable timeframe.
Appeals are reviewed independently and may consider additional documentation or updated financial circumstances. If the offer is returned or withdrawn, you may reapply if eligibility conditions change or pursue other options for resolving tax disputes with assistance from a tax professional.
Key Requirements Summary under Internal Revenue Code standards throughout the review period—failure to comply results in automatic return of the offer.
Form 433-OIC and supporting documentation. Inaccurate reporting may result in civil liability or denial. acceptance. Noncompliance reinstates the original liability plus penalties and interest.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
