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Understanding Form 656: Your Essential Guide to the IRS Offer in Compromise

Form 656 serves as a valuable resource for managing tax debt with less anxiety. The idea of negotiating with the IRS may feel daunting, but there is a program known as the Offer in Compromise (OIC). This program allows certain taxpayers to settle their tax liabilities for an amount lower than what they owe.

By filling out Form 656, taxpayers can officially submit their offer, which triggers a review process with the IRS. This can greatly reduce the stress associated with tax responsibilities, as many individuals often feel overwhelmed by their financial burdens.

Furthermore, exploring IRS payment plans can offer additional avenues for addressing tax obligations, helping taxpayers to approach their financial circumstances with improved clarity and assurance.

However, there is a caveat: the IRS approves only about 36% of OIC applications. This low acceptance rate can discourage many from attempting to file an OIC. Nevertheless, with thorough preparation and careful attention to detail, you can enhance your chances of approval.

In this guide, we will provide you with all the essential information regarding the Offer in Compromise process and Form 656 – the official application.

We will cover everything from eligibility criteria to determining a suitable offer amount in a clear and straightforward manner.

Do not let that 36% figure deter you from seeking potential tax relief.

With the assistance of Keith Jones, CPA, the Offer in Compromise may be the key to finally overcoming your tax debt. Let’s get started!

form 656 IRS Offer In Compromise

What is IRS Form 656?

Understanding Form 656: The Offer in Compromise (OIC) Process

Form 656 is the official Offer in Compromise (OIC) application that allows taxpayers to settle their IRS tax debt for less than the full amount owed. This agreement provides a path to financial relief for those who can prove that paying their full tax liability would cause undue hardship.

How an Offer in Compromise Works

When the IRS accepts an OIC, the taxpayer agrees to make a reduced payment to resolve their outstanding tax debt. The goal is to find a compromise that is reasonable for both the taxpayer and the IRS, based on the individual’s income, expenses, and asset value.

Who Qualifies for an Offer in Compromise?

To submit an OIC using Form 656, you generally must meet these requirements:
✅ All required tax returns have been filed.
✅ You’ve received a bill for at least one tax debt included in the offer.
✅ You’re current on estimated tax payments (if required).
✅ Business owners with employees must be up to date on federal tax deposits for the current and previous two quarters.

Does the IRS Accept All Offers?

No. Submitting Form 656 does not guarantee acceptance. The IRS thoroughly reviews:

  • Your income and expenses
  • The value of your assets
  • Any special circumstances affecting your ability to pay

If an offer is accepted, you can settle your tax debt for less than what you owe—providing much-needed relief.

Other Tax Relief Options

Some taxpayers may also explore Form 843 to request refunds or abatements of penalties, interest, or overpaid taxes.

If you’re considering an Offer in Compromise, expert guidance can help improve your chances of approval. Let’s discuss your options and find the best tax relief solution for you!

What is IRS Form 656?

Form 656 is the official IRS form used to submit an Offer in Compromise. An OIC allows eligible taxpayers to settle their tax debts for less than the full amount they owe. It is typically used when paying the full tax liability would cause financial hardship or if there is doubt as to the tax liability.

Who is eligible to file Form 656?

Eligibility for an Offer in Compromise is based on several factors: Doubt about Collectibility: This happens when the taxpayer cannot pay the full amount owed within the 10-year collection period. Doubt as to Liability: When there’s a genuine dispute over whether the tax debt is accurate. Effective Tax Administration: Even if the taxpayer can pay in full, doing so may cause financial hardship. It could also be unfair or inequitable .

What are the basic requirements for submitting Form 656?

To submit Form 656, the following criteria must be met: You must have filed all required tax returns. You must have made any required estimated tax payments for the current year. If you own a business with employees, you need to make all required federal tax deposits for this quarter. You cannot be in an open bankruptcy proceeding.

How do you calculate your Offer in Compromise amount?

The IRS uses a formula to determine if your offer is acceptable. The formula considers: Your reasonable collection potential (RCP), which is the amount the IRS believes it can collect from your assets and future income. The offer amount should reflect the RCP unless there are special circumstances that warrant a lower offer.

What forms and documentation are required with Form 656?

In addition to Form 656, you'll need: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, which provide a detailed financial statement. Supporting documentation like pay stubs, bank statements, asset appraisals, and expense receipts to substantiate your financial information.

What fees are associated with submitting Form 656?

There is a non-refundable application fee of $205, unless you qualify for low-income certification (detailed in Form 656). Additionally, an initial payment must be included with the offer, unless you are submitting under the low-income guidelines.

What payment options are available when submitting Form 656?

There are two payment options: Lump Sum Cash Offer: This requires 20% of the offer amount as an initial payment when submitting Form 656. The remainder is paid in five or fewer installments. Periodic Payment Offer: You need to make the first payment when you submit the offer. The rest of the balance is paid in monthly installments while the offer is being considered.

Can an Offer in Compromise be rejected?

Yes, the IRS can reject an OIC if: The offer is too low based on the taxpayer’s reasonable collection potential. The taxpayer has not provided accurate financial information or failed to meet the eligibility criteria. The taxpayer is not compliant with current filing and payment obligations.

What happens if the IRS rejects the offer?

If the IRS rejects your offer, you can: To appeal the decision, you need to submit Form 13711. This form is called the Request for Appeal of Offer in Compromise. Make sure to do this within 30 days of the rejection. Resubmit a new offer, typically after reviewing and adjusting the offer amount based on the IRS’s feedback.

How long does it take to process Form 656?

The processing time for an OIC can vary but typically takes between six months to a year. During this time, collection activities may be suspended, but interest and penalties continue to accrue on the tax debt.

What happens after an Offer in Compromise is accepted?

Once the IRS accepts your OIC: You must remain in compliance by filing all required tax returns and paying all taxes on time for the next five years. Failure to remain compliant will result in the IRS revoking the offer, reinstating the original debt minus any payments made.

What is a Form 656 booklet offer in compromise

The Form 656 Booklet is an Offer in Compromise (OIC) package provided by the IRS for taxpayers seeking to settle their tax debt for less than the full amount owed. It includes all the necessary forms, instructions, and guidelines to apply for an OIC.