Form 656 (2024): Offer in Compromise Checklist
Form 656 allows taxpayers with unpaid federal tax liability to propose settling their debt for less than the full amount owed. This checklist provides accurate guidance based on current IRS instructions to help you complete your application correctly.
Confirm Your Eligibility
You must meet specific requirements before the IRS will consider your offer. First, you must have filed all legally required tax returns and received a bill for at least one tax debt included in your offer. Second, you must make all required estimated tax payments for the current year, and you cannot be in an open bankruptcy proceeding.
Understand the Three Offer Types
The IRS accepts offers based on three distinct grounds. Doubt as to liability applies when you have a genuine dispute about whether you owe the tax or the amount owed. Doubt as to collectibility arises when you cannot pay the full amount from assets or income, given Reasonable collection potential. Effective tax administration applies when collection would create economic hardship or be unfair despite your ability to pay.
Gather Required Financial Documentation
Complete financial disclosure is essential for your offer evaluation. You must submit Form 433-A
(OIC) if you are an individual or self-employed taxpayer showing your assets, income, and expenses. Business entities must submit Form 433-B (OIC) documenting business assets, revenue, and costs with supporting documentation for all reported values.
Calculate Your Reasonable Collection Potential
The IRS determines your minimum acceptable offer amount using a specific formula.
Reasonable collection potential equals your quick-sale asset value plus your future income potential over the applicable payment period. Quick-sale value is calculated as 80 percent of fair market value minus any loans or encumbrances against those assets.
Determine Your Payment Structure
You must choose between two payment options when submitting your offer. A lump-sum payment requires 20 percent of the total offer amount submitted with your application, with the remaining balance paid within 5 months of acceptance. Periodic payment requires your first monthly payment to be submitted with the application, and the remaining balance to be paid in monthly installments over 6 to 24 months, according to your proposed terms.
Step-by-Step Application Process
Step 1: Complete Form 433-A or Form 433-B
Gather bank statements covering the three most recent months for individual accounts or six months for business accounts. You must document all assets, including real property, vehicles, retirement accounts, and business equity, using current fair market valuations.
Step 2: Calculate Asset Values Using Quick-Sale Method
Apply 80 percent to the fair market value of each asset and subtract outstanding loan balances to determine net realizable equity. The IRS allows a $1,000 deduction from total bank balances and $3,450 from the first vehicle’s equity for individuals.
Step 3: Determine Monthly Disposable Income
Calculate your gross monthly household income from all sources, including wages, self-employment income, Social Security, pensions, and rental income. Subtract allowable monthly expenses based on IRS Collection Financial Standards to determine your remaining monthly income available for tax payments.
Step 4: Complete Form 656 With Offer Amount
Enter your total offer amount on the designated line, indicating whether you propose lump sum or periodic payment terms. Your offer must equal or exceed your reasonable collection potential calculated from your asset equity plus future income multiplier.
Step 5: Include Application Fee and Initial Payment
Submit the nonrefundable $205 application fee with your Form 656 package unless you qualify for low-income certification based on adjusted gross income. Include your initial payment based on your chosen payment option as specified in the form instructions.
Step 6: Attach All Supporting Documentation
Include complete copies of bank statements, investment account statements, vehicle titles or loan documents, and property appraisals or assessments. You must also attach proof of
monthly expenses such as utility bills, mortgage or rent statements, and insurance premium documentation.
Step 7: Add Power of Attorney if Using Representative
Attach Form 2848 if you authorize a tax professional to represent you and no current power of attorney exists on file. The form must list all tax years and tax types included in your offer to ensure proper representation authority.
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 8: Mail Package to Correct IRS Location
Send your completed application to the IRS address designated for your state as listed in the
Form 656-B booklet instructions. Individual taxpayers may also submit their offer electronically through the Individual Online Account system for faster processing.
Important Compliance Requirements
You must maintain full tax compliance during the evaluation period and for five years after acceptance. This means filing all required returns on time, paying all estimated taxes, and making all federal tax deposits if you are a business owner. Failure to maintain compliance will result in default of your accepted offer and reinstatement of the original tax debt.
Low-Income Certification Guidelines
The IRS waives the application fee and initial payments for qualifying low-income taxpayers.
You are eligible if your adjusted gross income from your most recent tax return falls at or below the threshold shown in the Form 656 chart based on your family size and geographic location.
Application Processing Timeline
The IRS typically processes offers within 6 to 12 months, depending on case complexity and current workload. Your offer is automatically accepted by law if the IRS does not notify you of a decision within 24 months of receipt at the centralized processing unit. Penalties and interest continue accruing during the evaluation period, even while collection actions are generally suspended.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
