Form 656, the offer in compromise, is a proposed contract offering to settle a tax debt with the Internal Revenue Service (IRS) for less than you owe. If you can make a case that this is the government's best chance to get the most money, you might be able to persuade the IRS to accept your offer.
The IRS will only accept this offer under certain circumstances. There are no guarantees, and your offer might be rejected, or it might be returned to you as "unprocessable." There are a few situations that make it more likely for your offer to be accepted, though.
What Is Form 656?
If you fall behind on your taxes, the debt burden can add up quickly. Missed tax payments accrue penalties and interest, making it that much harder to pay back the debt. Form 656 provides a way to reach an agreement with the IRS that you'll pay less than what's owed.
Form 656, the "offer in compromise" (OIC), gives the IRS an overview of your financial situation so it can review your debt and ability to pay and determine whether the offer suits both parties' best interests.
Who Uses Form 656?
You can request an OIC for any one of three possible reasons. The three potential reasons for requesting an OIC include situations in which:
- There's doubt as to the collectibility of your tax debt.
- There's doubt of your liability for the debt.
- It's "effective tax administration" because of an exceptional circumstance.
Once you know why you're requesting an OIC, you'll have to prove your case.
Doubt as to Collectibility
Doubt as to collectibility means that the taxpayer isn't likely to ever be able to pay the full amount of taxes owed to the IRS. It doesn't mean you doubt that you actually owe the outstanding balance of tax debts—you accept that you owe a debt. You're telling the IRS that it can pursue you for the debt all it wants, but it won't be able to get all the money, because you just don't have it. You don't have assets you can liquidate or refinance to raise the money, and you're unlikely to be approved for an unsecured loan.
Doubt as to collectibility is the primary reason why the vast majority of taxpayers request an OIC.
Doubt as to Liability
This means that you don't think you're actually responsible for the outstanding balance of the tax debt. You must submit a statement explaining why you believe this to be so.
It might be easier, faster, and less costly to find a way to resolve the underlying tax liability than to seek an OIC based on doubt as to liability. Alternatives include filing an amended tax return to correct any perceived errors, requesting innocent spouse or injured spouse relief, seeking penalty abatement, or asking for an audit reconsideration.
Effective Tax Administration
In this case, you're claiming that exceptional circumstances would pose a serious economic hardship to you if you were to pay the tax. It would be unfair and inequitable to collect the entire balance from you. You don't doubt that you're responsible for the outstanding tax debt, or that the IRS could probably collect the full amount due if it were to try.
Significant economic hardship cases would include serious health problems. Enrolled agent David Bauman, an offer-in-compromise specialist with JK Harris, advises:
"In submitting an offer based on effective tax administration, the taxpayer needs to provide extensive narrative of the special and extraordinary circumstances, along with the rest of the offer-in-compromise documentation. Right now, extraordinary circumstances would mean some sort of life-or-death situation, such as a serious medical condition."
Alternatives include seeking a long-term installment agreement, requesting a partial-pay installment agreement, or seeking penalty abatement based on reasonable cause.
The IRS rarely approves an offer based on effective tax administration.
Where to Get Form 656
You can download the full Form 656 booklet from the IRS website and fill it out yourself, but it's usually recommended that you work with a tax professional to complete this and any other related forms. It's not easy to get your OIC right, so enlisting some help will give you a better chance of succeeding.
How to Fill Out and Read Form 656
The Form 656 booklet contains detailed instructions along with additional forms you might need to include with your OIC. You'll need to be ready with detailed information about your personal and business finances, including employment, wages, assets, and liabilities. Be sure you are prepared with all of these details, along with an explanation for why you're making the offer.
You must also indicate the payment terms for your offer. These begin from the date the IRS accepts and approves your OIC. You can choose one of two options:
- Lump-sum payment: This includes 20% of your total offer up front, plus a proposed payment plan over the next one to five months.
- Periodic payment: You propose to pay off your offered amount over a period of six to 24 months.
Unless you meet the low-income certification guidelines, you should plan on paying your proposed monthly amounts until you hear whether the IRS has accepted or rejected your offer.
The IRS will reject your OIC if you have not filed all required tax returns or kept up with estimated payment obligations. You also cannot be in bankruptcy proceedings. Be sure to pay the required fee of $205 with Form 656 and make all your proposed OIC payments until you hear back from the IRS about its decision. However, there is no fee for certain low-income individuals or those who are filing an OIC for doubt of liability.
Can Form 656 Be E-Filed?
You cannot e-file Form 656. To submit all required paperwork, you must mail your offer in compromise to the appropriate IRS office. You can, however, set up payments electronically.
Where to Mail Form 656
If you live in Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, or Washington, mail your completed Form 656 to:
Memphis IRS Center COIC Unit
P.O. Box 30803, AMC
Memphis, TN 38130-0803
Residents of all other states or a foreign country should send their form to:
Brookhaven IRS Center COIC Unit
P.O. Box 9007
Holtsville, NY 11742-9007
How to File Form 656
The Form 656 booklet has detailed instructions for how to file your offer in compromise. Make sure you have filled out all required sections, included any necessary fees and initial payments, and send your forms to the correct address for your state.
The IRS offers an interactive pre-qualifying tool to help you determine whether you're eligible before you go to the trouble and expense of preparing your offer.
What Are the Odds of Acceptance?
The majority of OIC applications are returned as unprocessable or are rejected. The IRS accepted and approved just shy of 33% of OICs received in 2019. This worked out to about 17,890 approvals among 54,225 applications received.
The IRS will generally accept an OIC if all the paperwork is in order and it believes that the offer is the most money it's likely to be able to collect. It will probably reject your application if it believes it can collect more from you than what you've offered.
You have 30 days to appeal if the IRS rejects your offer. Use Form 13711 to explain why you disagree with the decision.
If Your Offer Is Accepted
The offer in compromise is a contract between you and the IRS, so you should read IRS Form 656 very carefully before you sign and submit it. The OIC contract sets forth your responsibilities, and any refunds due for a specific tax year will be applied toward your debt until it is paid off. The IRS can, and likely will, revoke acceptance of your offer and re-instate the full amount of your original tax debt if you fail to comply with any of the contractual provisions.
- Form 656 is how a taxpayer proposes a contract for an "offer in compromise" (OIC) to settle a tax debt with the IRS for less than what they owe.
- The IRS is only likely to accept your offer if it's clear that it won't get more from you otherwise.
- To increase your chances of getting your offer accepted, you must be current on all tax filings and other tax payments, must not be in bankruptcy proceedings, and must pay the required fee and proposed payments.
- Because the IRS rejects most offers in compromise, it's a good idea to work with a tax professional to give yourself the best chance of getting yours accepted.