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Key Facts
- Federal level: Form 656 proposes an offer in compromise, an agreement to settle specified federal tax liabilities for less than the full assessed amount.
- Federal level: Doubt as to collectibility and effective tax administration offers use the Form 656-B package, while doubt as to liability uses Form 656-L.
- Federal level: The IRS evaluates income, allowable expenses, asset equity, ability to pay, and the selected legal basis; submitting the form does not guarantee acceptance.
- Federal level: A lump-sum offer generally requires 20% of the offered amount with submission, while a periodic offer generally requires the first installment and continuing proposed installments.
- Federal level: The current application fee is $205, but qualifying low-income individuals can receive the booklet’s fee and payment waiver.
- Federal level: A rejected offer generally carries a 30-day appeal opportunity, while a returned offer generally does not.
Form 656 starts an offer in compromise
Section 7122 authorizes the Treasury to compromise federal tax cases, and Form 656 records the taxpayer’s proposed terms. An accepted offer settles only the liabilities and periods identified in the agreement; merely submitting a form does not reduce the assessment.
The current stand-alone Form 656 warns that individuals should use the Form 656-B booklet. The booklet combines instructions, Form 656, Form 433-A (OIC) for wage earners and self-employed individuals, Form 433-B (OIC) for businesses, and a checklist.
The legal basis determines the correct form
Doubt as to collectibility means the IRS doubts the full liability can be collected from available assets and future income. Effective tax administration applies when the liability is legally owed and collectible but collection in full would create economic hardship or exceptional circumstances recognized by the rules.
Doubt as to liability is different because it disputes the existence or amount of the correct assessed debt. Form 656-L handles that basis and does not require the ordinary application fee or initial offer payment.
Financial disclosure supports a collectibility offer
The IRS reviews cash, investments, property equity, business assets, income, and allowable living expenses. The financial statement helps estimate reasonable collection potential, which usually anchors the minimum acceptable amount for a collectibility offer.
Not every actual expense is automatically allowed in that calculation. IRS national and local standards, necessary-expense rules, asset valuation, dissipation issues, and special circumstances can change the analysis.
Payment choices affect submission requirements
A lump-sum offer under section 7122 is payable in five or fewer installments and generally requires 20% with submission. A periodic-payment offer uses six or more installments, generally requires the first installment with submission, and normally requires continued proposed payments while the IRS evaluates it.
Qualifying low-income individuals can be exempt from the application fee and initial or periodic offer payments while the offer is pending. The certification and thresholds appear in the current booklet and apply to individuals rather than business entities.
Processability is different from acceptance
An offer can be returned without a merits decision when required returns are missing, current tax obligations are not being met, bankruptcy is open, or required information, fee, or payment is absent. A returned offer is different from a rejection after substantive evaluation.
A rejection generally may be appealed within 30 days of the rejection letter. A return generally has no comparable appeal right, although a correctable defect may permit a later new submission.
Acceptance creates continuing terms
An accepted offer requires payment according to its terms and continued filing and payment compliance for the period stated in the agreement. Default can permit the IRS to reinstate compromised liabilities, less payments already received, together with applicable additions.
The IRS generally suspends collection by levy while a processable offer is pending and during specified rejection-appeal periods, subject to statutory exceptions. Interest and penalties can continue to accrue until acceptance and satisfaction of the agreement.
Form 656 is not penalty abatement
An offer addresses collection or compromise of liabilities; it is not the same as challenging an assessment, requesting innocent-spouse relief, or seeking penalty relief. The related guide to first-time penalty abatement concerns a narrower administrative waiver rather than compromise of the entire debt.
