Form 656 (2023): Offer in Compromise Checklist
Form 656 allows eligible taxpayers to resolve federal tax debt for less than the full amount owed by agreeing with the Internal Revenue Service. This checklist explains eligibility requirements, financial disclosures, and procedural steps required to submit a complete and reviewable offer in compromise application.
Understanding Eligibility Requirements
Before submitting Form 656, you must meet eligibility standards established by the Internal
Revenue Service. All required tax returns must be filed, at least one assessed tax debt must exist, and required estimated tax payments must be current for the ongoing tax year.
Selecting the Correct Offer Basis
The Internal Revenue Service evaluates offers using three legally defined bases. Selecting the correct basis is critical because it determines documentation requirements, review standards, and whether financial disclosures are required.
- Doubt as to collectibility: This basis applies when you cannot pay the full tax debt
based on income and asset equity. The IRS evaluates reasonable collection potential using financial disclosures.
- Doubt as to liability: This basis applies when there is a legitimate dispute regarding the
accuracy of the assessed tax under the law. Financial information is not required for these offers.
- Effective tax administration: This basis applies when full collection would cause
economic hardship or would be inequitable despite the ability to pay. Supporting hardship documentation is required.
Required Financial Disclosure Standards
Most offers require detailed financial disclosure to calculate reasonable collection potential. The
IRS uses standardized methods to evaluate assets, income, and allowable expenses.
Step-by-Step Form 656 Application Process
Step 1: Gather Financial Documentation
Collect current bank statements, asset valuations, income records, and household expense documentation covering the prior twelve months. The IRS uses this information to verify financial accuracy and calculate reasonable collection potential.
Step 2: Complete Form 433-A (OIC) for Individuals
Individual taxpayers must complete Form 433-A (OIC) to disclose income, expenses, assets, liabilities, and retirement accounts. All household income sources must be reported accurately using current market values.
Step 3: Complete Form 433-B (OIC) for Businesses
Business entities must complete Form 433-B (OIC) to report business income, operating expenses, assets, and equity. The IRS evaluates business financial capacity separately from individual financial capacity.
Step 4: Calculate Reasonable Collection Potential
Calculate reasonable collection potential by combining net asset equity and projected future income. The IRS multiplies the monthly disposable income by twelve or twenty-four months, depending on the selected payment option.
Step 5: Apply IRS Expense Standards
Apply IRS Collection Financial Standards when determining allowable expenses. National standards apply to basic living costs, while local standards apply to housing, utilities, and transportation based on geographic location.
Step 6: Value Retirement Accounts Correctly
Report retirement accounts at 80% of the current market value to reflect quick-sale value.
Subtract any outstanding loan balances to determine the net equity included in the reasonable potential collection calculation.
Step 7: Prepare the Offer Payment
Prepare the initial payment for the selected payment option. Lump-sum offers require 20% paid with the application, while periodic-payment offers require the first monthly payment submitted with Form 656.
Step 8: Assemble Supporting Documentation
Assemble all required attachments in the order specified in the Form 656 expenses.
Documentation must support all reported income, expenses, assets, and liabilities to avoid processing delays or application returns.
Step 9: Submit Application Fee and Payments
Include the required two hundred five dollar application fee unless you qualify for low-income certification. Payments may be made by check, money order, or through the Electronic Federal
Tax Payment System.
- Asset valuation standards: Assets are valued at their quick-sale value, generally
- Income calculation requirements: The IRS reviews average monthly income using
- Lump-sum payment option: Lump-sum payments require payment of the remaining
- Periodic payment option: Periodic offers require continued monthly payments during
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Sign and Submit Under Penalty of Perjury
Sign Form 656 certifying that all information is accurate and complete under penalty of perjury.
Authorized representatives must submit Form 2848 if the power of attorney is not already on file.
Asset and Income Evaluation Rules
The IRS evaluates assets and income using standardized valuation rules. Understanding these rules helps prevent understatements or overstatements that may result in rejection. eighty percent of their fair market value minus secured debt. Vehicles and personal residences are included using standardized exemption amounts. recent pay records and verified income sources. Household income must be fully disclosed even if expenses are shared.
Payment Options and Compliance Obligations
Selecting the correct payment structure affects offer eligibility and long-term compliance obligations. Payment terms must be followed precisely after acceptance. balance within 5 months of acceptance—failure to complete payments results in default.
IRS review and after acceptance until the offer amount is paid in full.
IRS Review Process and Considerations
The IRS reviews expenses for completeness, accuracy, and legal eligibility before conducting a financial analysis. Missing documentation or incorrect calculations commonly result in returned applications.
Compliance Requirements After Submission
You must remain fully compliant while the offer is under review by filing all required returns and paying estimated taxes. Failure to comply allows the IRS to resume enforced collection actions.
Post-Acceptance Responsibilities
After acceptance, you must remain compliant with all federal tax filing and payment requirements for five years. Any default allows the IRS to reinstate the original tax liability with accrued interest and penalties.
Frequently Asked Questions
Does filing Form 656 stop IRS collection actions?
Filing Form 656 generally pauses most active collection actions during review. However, penalties and interest continue to accrue until the offer is accepted and paid.
Are retirement accounts always included in the calculation?
Yes, retirement accounts must be reported and valued at quick-sale value. Federal or state creditor protections do not exclude retirement accounts from consideration.
Can I submit an offer if I have an installment agreement?
Yes, submitting an offer suspends installment payments during review. Payments resume if the offer is rejected or returned.
What happens if my offer is returned?
Returned offers are not appealable and usually result from missing information or eligibility issues. You may correct the problem and submit a new application.
How long does an IRS review take?
IRS review times vary based on case complexity and workload. Reviews typically take 6 to 12 months to complete.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
