Form 656 (2021): Offer in Compromise Checklist
Form 656 allows taxpayers to settle federal tax debt for less than the full amount owed through an Offer in Compromise. This checklist guides you through the preparation and submission process in accordance with current IRS requirements and official procedures.
Understanding Offer in Compromise Eligibility
Before submitting Form 656, you must meet specific eligibility requirements established by the
IRS. You must have filed all required tax returns, received at least one bill for tax debt, and made all current year estimated tax payments. Business owners with employees must also make required federal tax deposits for the current and two preceding quarters.
Step-by-Step Process
Step 1: Gather Financial Information
Collect documentation that shows your complete financial picture, including bank statements, investment and retirement accounts, and property values. You must provide the most recent two months of pay stubs, business income statements, and proof of all asset values you report on collection information statements.
Step 2: Complete Form 433-A or Form 433-B
Individual wage earners and self-employed taxpayers must complete Form 433-A (OIC)
showing monthly income and allowable expenses. Corporations, partnerships, and limited liability companies must complete Form 433-B (OIC) detailing business assets, revenue, and operating expenses using current financial data.
Step 3: Calculate Reasonable Collection Potential
Determine your offer amount using either the asset approach or the income approach, in accordance with IRS collection standards. The IRS compares your calculated reasonable collection potential against the total tax liability to evaluate whether your offer represents the maximum the agency can expect to collect.
Step 4: Complete Form 656
Fill out Form 656, identifying the tax years and tax types you want to compromise, along with your proposed offer amount. Your offer must equal or exceed the calculated reasonable
collection potential unless you qualify under effective tax administration provisions for exceptional circumstances.
Step 5: Select Payment Option
Choose between a lump-sum payment requiring 20 percent upon submission and the remainder within five months, or a periodic payment with the first payment included and monthly installments over 6 to 24 months. Low-income certification exempts eligible taxpayers from initial payments and application fees during the evaluation period.
Step 6: Include Application Fee
Submit the $205 application fee with your offer package using a separate check or money order payable to the United States Treasury. Taxpayers who meet low-income certification guidelines based on income-to-poverty-line ratios do not need to pay the application fee or make initial offer payments.
Step 7: Attach Supporting Documents
Include copies of required documentation such as recent bank statements, proof of income, asset valuations, and loan statements. Attach a written explanation describing the circumstances that prevent you from paying the full liability, including any economic hardship, health issues, or special situations.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 8: Sign and Submit Form 656
Sign and date Form 656 with an original ink signature if submitting by mail, or submit electronically through your individual online account if available. Mail the complete application package to the IRS address specified in the instructions, retaining copies of all submitted materials for your records.
Special Situations and Considerations
Married taxpayers with both joint and separate tax debts must submit separate Forms 656 for each spouse, listing all applicable liabilities. Each form requires its application fee unless low-income certification applies, and both spouses must provide complete financial information through Form 433-A (OIC).
Taxpayers with existing installment agreements are not required to make monthly payments while the IRS evaluates the offer submission. The IRS will reinstate the installment agreement if your offer is rejected and you have not incurred additional tax debt during the evaluation period.
Understanding Offer Types and Grounds
The IRS accepts offers based on three grounds: doubt as to collectibility when assets and income are insufficient to pay the full amount, doubt as to liability when legitimate questions exist about the correct tax amount, or effective tax administration when collection would create economic hardship or exceptional circumstances exist.
What Happens After Submission
The IRS contacts you after receiving your offer to request additional information or clarification about your financial situation. You must respond promptly within the specified timeframes, or the
IRS will return your offer without appeal rights and apply any initial payments to your outstanding tax debt.
Penalties and interest continue to accrue during offer evaluation, and the IRS may offset any tax refunds from returns filed before acceptance against your liability. You must remain current with all filing and payment obligations during evaluation and for five years after acceptance to avoid default.
Appeal Rights for Rejected Offers
Taxpayers whose offers are rejected receive a written letter explaining the specific reasons for rejection within the evaluation timeframe. You have 30 days from the rejection letter date to request an appeal by submitting Form 13711 to the IRS Office of Appeals for independent review.
The IRS may retain levy proceeds received during the offer period and may continue collection actions until an authorized official acknowledges the offer as pending. Contact the IRS immediately if levy action occurs after submission to resolve the collection activity during the evaluation period.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
