Form 656 (2022): Offer in Compromise Checklist
Form 656 is the Offer in Compromise application used to request settlement of certain income taxes and related tax obligations for less than the full balance owed. The IRS evaluates each offer based on tax administration standards, the potential for reasonable collection, and compliance with all filing and payment requirements.
Verify Eligibility for an Offer in Compromise
The IRS considers an offer to compromise only when the taxpayer qualifies under one of the following: doubt as to collectibility, doubt as to liability, or effective tax administration. You must have filed all required income tax returns, including any amended versions, and received a bill for at least one tax period included in Form 656.
Determine the Appropriate Form 656 Filing Type
You must select the correct version of Form 656 based on your offer and the type of tax liability involved. Using the wrong form will result in rejection before substantive review begins.
- Form 656-B: This version applies to most income taxes and requires supporting
financial disclosures through a Collection Information Statement. It is used when submitting a standard Offer in Compromise application based on the inability to pay.
- Form 656-L: This form is used for doubt as to liability cases when you believe the
assessed tax is incorrect. IRS 656-L does not require financial disclosures, but it must clearly explain the legal or factual error.
Calculate Reasonable Collection Potential
The IRS determines reasonable collection potential by reviewing asset equity, future income, and allowable expenses using standardized formulas. This calculation determines the minimum acceptable offer amount under tax administration rules.
Step-by-Step Application Process
Step 1: Gather Required Financial Documentation
Collect bank statements, proof of income, real estate valuations, and expense records dated within 90 days to support your Collection Information Statement and verify financial accuracy.
Step 2: Complete the Required Financial Statement
Complete the Collection Information Statement applicable to your filing status, including disclosures related to self-employed individuals, asset ownership, and monthly income sources.
Step 3: Complete Form 656 Accurately
Complete the fillable Form 656 and ensure Sections 1 through 5 and Section 8 are fully completed, including taxpayer identifying information and the correct instruction year.
Step 4: Select the Correct Payment Method
Choose either a lump sum or periodic payment option and include Form 656-PPV as the
Periodic Payment Voucher if required by your selected payment terms.
Step 5: Calculate the Offer Amount
Determine your offer using asset equity, including real estate, and projected future income to meet the IRS's reasonable collection potential requirements.
Step 6: Include Required Fees and Initial Payment
Include the required application fee and initial payment unless you qualify for an exemption, and ensure payments are properly applied using direct deposit when applicable.
Step 7: Review for Filing Errors
Confirm there are no missing signatures, incorrect Social Security numbers, or Employer
Identification Numbers that could trigger e-file rejection codes.
- Foreign income considerations: Taxpayers claiming foreign-earned income under
- Estate and transfer tax issues: Offers involving Form 706 Estate Tax Return,
- Social Security income reporting: Social Security benefits must be reported accurately
- Request for appeal: If the IRS rejects your offer, you may submit a Request for appeal
- Professional representation: A qualified tax professional can assist with responding to
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 8: Submit the Application Package
Mail Forms 656 and all supporting documents to the appropriate IRS processing location and retain proof of delivery for your records.
Required Supporting Forms and Special Situations
Certain taxpayers must include additional IRS forms depending on income sources, estate matters, or international tax considerations.
Section 911 must ensure that all related income tax return disclosures are consistent.
Errors involving foreign income frequently delay the review of Offer in Compromise applications.
Generation-Skipping Transfer taxes, or Qualified Domestic Trusts require additional documentation. The IRS may request Notification of Distribution records to confirm asset transfers. using the correct Social Security forms. Misreported benefits often result in revised collection calculations.
IRS Review and Appeal Rights
Once submitted, the IRS reviews the Offer in Compromise application in accordance with internal tax administration guidelines. You may monitor your account status using your Individual
Online Account during this process. within the allowed timeframe. Appeals must address the IRS's reasoning and include supporting documentation.
IRS requests, correcting deficiencies, and addressing disputes related to doubts about liability or collectibility.
Compliance Requirements After Submission
You must remain fully compliant with all federal filing and payment obligations while the IRS evaluates your offer. Failure to file future income tax returns or pay required taxes will result in the automatic return of the application.
After Acceptance and Long-Term Compliance
After acceptance, you must remain compliant for five years by timely filing all income tax returns and paying all taxes owed. Failure to meet post-acceptance requirements allows the IRS to reinstate the original tax liability and pursue enforced collection.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
