IRS Form 656: Instructions for Requesting an Offer in Compromise
When you cannot pay your tax debt in full, but you do have some resources from which to make payments toward your tax debt, you may choose to apply to the IRS for an Offer in Compromise (OIC).
You can also apply for an Offer in Compromise if paying your entire tax debt would cause you economic hardship, would be unfair or inequitable, or because you simply have insufficient assets and income to pay the full amount of the tax debt.
An Offer in Compromise allows you to settle your tax debt with the IRS for an amount that is less than the full amount that you owe.
Basic Guidelines for Requesting an OIC
In order to request an Offer in Compromise from the IRS, you must fill out and submit IRS Form 656. You also must submit IRS Form 433-A if you are requesting an Offer in Compromise as an individual taxpayer, or IRS Form 433-B if you are requesting an Offer in Compromise as a business.
Moreover, in order to complete your application, you must pay a $186 non-refundable application fee as well as a payment toward your tax debt. The amount of your initial payment may vary. You have the option of paying either:
- 20% of the initial offer amount with your application, with the offer amount to be paid in full once the IRS accepts your offer, or
- an initial monthly payment, which you continue to pay each month while the IRS considers your application, as well as after the IRS accepts your offer.
However, if you meet the Low Income Certification guidelines of the IRS, you will not need to pay the $186 application fee, or make an initial monthly payment until the IRS accepts your offer. After the IRS accepts your offer, you must then begin making payments toward your compromised tax debt.
Completing Form 656
In order to complete Form 656, you will need to gather certain information about the taxes, interest and penalties that you owe, as well as the tax years or periods for which you owe those taxes.
Section 1: Your Contact Information
This section of Form 656 asks for basic contact information for you, your spouse and/or your business, including names, addresses, social security numbers and employer identification numbers.
Section 2: Tax Periods
Choose the type of tax, tax return(s) and tax period(s) that you are including in your application for an Offer in Compromise. If you need more room than provided on the form, you can attach an additional page or pages, which you should title “Attachment to Form 656 dated ____________.”
Section 3: Reason for Offer
Select one of the following two options as the reason for your Offer in Compromise:
- Doubt as to Collectibility (insufficient assets and income to pay)
- Exceptional Circumstances (paying full debt would cause economic hardship or would be unfair and inequitable)
If you choose the “Exceptional Circumstances” option, you must include a written statement explaining your exceptional circumstances to the IRS. You also should attach any documentation of your circumstances. For instance, if you have a serious illness that impairs your ability to work and causes you extensive medical expenses, you could attach medical reports and bills in order to help prove that you have a serious illness.
Section 4: Low Income Certification (Individuals Only)
Only individuals, not businesses, can complete this section of Form 656. You must evaluate your family size, geographical location, and your applicable monthly gross household income in order to determine whether you qualify for low-income certification.
If you qualify for low-income certification according to the IRS guidelines, then you will not have to pay the Offer in Compromise application fee, and you may not have to make a payment toward your tax debt while the IRS is in the process of considering your application.
Section 5: Payment Terms
In this section, you first must provide the IRS with the amount of your total offer of payment toward our tax debt. You then have two different payments options from which to choose:
- Payment Option 1 – Payment of offer in five or fewer monthly payments
- You must include a check for 20% of your offer amount, unless you are an individual and eligible for low-income certification.
- You also must fill in the dates and amounts of your future payments.
- Payment Option 2 – Payment of offer in more than five monthly payments
- You must include a check for the amount of one monthly payment, unless you are an individual and eligible for low-income certification.
- You also must fill in the amount of your monthly payment, the day of the month on which you will make your payment, and the total number of months that you will make payments in order to pay off your order amount.
- You must continue to make the monthly payments while the IRS is considering your application for an Offer in Compromise.
Section 6: Designation of Down Payment and Deposit (Optional)
This section of Form 656 is optional for you to complete. If you wish, you can have the payment included with your application applied to a specific tax debt from a specific tax year. You can also pay more than your required initial payment, and have that amount designated as a deposit on your Offer in Compromise.
Section 7: Source of Funds
In this section, you must describe the source of the funds that you will use to make payments toward your tax debt, whether it is money that you have borrowed from family or friends, a bank loan, or the proceeds from selling your property.
Section 8: Offer Terms
There is no information for you to provide in this section of Form 656. Rather, this section sets forth all of the terms and conditions of making an Offer in Compromise. More specifically, this section details all of your rights and responsibilities with respect to making an Offer in Compromise and the consequences of failing to meet the requirements of an Offer in Compromise.
Section 9: Signatures
In this section, you must sign and date Form 656 under oath. If you are filing an Offer in Compromise jointly with your spouse, he or she must also sign and date the form.
Section 10: Paid Preparer Use Only
This section is to be completed only if you are using a paid preparer for your Offer in Compromise application.
Section 11: Third Party Designee
In this section, you can authorize the IRS to discuss your Offer in Compromise application with another person whom you designate.
Submitting Form 656 to the IRS
Once you have completed Form 656, you must submit it to the IRS with the rest of your application packet, including Form 433-A or Form 433-B, your application fee, and your initial payment fee. The IRS then will consider your Offer in Compromise application, and determine whether you are entitled to pay your offer amount rather than the full amount of your tax debt.