Form 656: Offer in Compromise

What is Form 656?

Form 656 is the official application to submit an Offer in Compromise (OIC) to the IRS. It's your formal proposal to settle your tax debt for less than the full amount owed.

Form 656 Sections

Section 1: Taxpayer Information

Basic identifying information including name, SSN, address, and contact details.

Section 2: Offer Details

This is where you specify your offer amount and payment terms:

• Lump Sum Cash: Pay within 5 months of acceptance
• Periodic Payment: Pay over 6-24 months

Section 3: Reason for Offer

Select the basis for your offer:

• Doubt as to Collectibility: Cannot pay full amount (most common)
• Doubt as to Liability: Question whether you actually owe the tax
• Effective Tax Administration: Would create economic hardship or be unfair

Section 4: Offer Amount Calculation

Detail how you calculated your offer based on:

• Realizable value of assets
• Future income potential
• Special circumstances

Required Supporting Documents

• Form 433-A (OIC): Collection Information Statement
• Form 656-B: OIC Booklet with instructions
• $205 Application Fee: Unless you qualify for low-income waiver
• Initial Payment: 20% for lump sum, first payment for periodic
• Supporting Documentation: Bank statements, pay stubs, proof of expenses

Calculating Your Offer Amount

The IRS uses this formula:

• Lump Sum: Disposable income × 12 months
• Periodic Payment: Disposable income × 24 months

Payment Terms

Lump Sum Cash Offer

• Submit 20% of offer amount with application
• Pay remaining 80% within 5 months of acceptance
• Lower multiplier for income calculation (12 months)

Periodic Payment Offer

• Submit first payment with application
• Continue making payments during review process
• Pay remainder within 6-24 months of acceptance
• Higher multiplier for income calculation (24 months)

Tips for Form 656 Success

• Calculate Realistically: Offer too low gets rejected; too high wastes money
• Document Everything: Prove you cannot pay more
• Be Current: Must have filed all required returns and made current year estimated payments
• Stay Compliant: Make all payments on time during review and for 5 years after acceptance
• Include Written Explanation: Explain special circumstances affecting your ability to pay

Common Reasons for Rejection

• Offer amount too low compared to reasonable collection potential
• Missing or incomplete Form 433-A
• Not current with filing or payment requirements
• In open bankruptcy proceedings
• IRS determines you can pay in full through installment agreement

After You Submit

1. Acknowledgment: IRS sends letter confirming receipt
2. Review: 6-12 months average processing time
3. Decision: Accepted, rejected, or counter-offer
4. Appeal Rights: 30 days to appeal rejection