- Form 656 is used to propose a contract for an "offer in compromise" (OIC) to settle a tax debt with the IRS for less than what you owe.
- The IRS is only likely to accept your offer if it's clear that it won't get more from you otherwise.
- You must be current on all tax filings and other tax payments, must not be in bankruptcy proceedings, and you must pay the required fee and proposed payments.
- It's a good idea to work with a tax professional to give yourself the best chance of getting your offer accepted because the IRS rejects most offers in compromise.
What Is Form 656?
The debt burden can add up quickly if you fall behind with tax payments. Missed tax payments accrue penalties and interest, making it that much harder to pay off 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 that it can review your debt and your ability to pay. It will determine whether the offer suits both parties' best interests.
Who Uses Form 656?
You can request an OIC for any one of three reasons:
- There's doubt as to the collectability of your tax debt.
- There's doubt about your liability for the debt.
- It's "effective tax administration" because of an exceptional circumstance.
You'll have to prove your case.
Doubt As to Collectability
Doubt as to collectability means that a taxpayer isn't ever likely to be able to pay the full amount of tax debt owed to the IRS. It doesn't mean that you doubt that you owe the outstanding balance. 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 don't have it. You don't have any assets you can liquidate or refinance to raise the money. You're not likely to be approved for an unsecured loan.
Alternatives to an OIC based on this reason would be the arrangement of a long-term installment agreement or a partial-pay installment agreement with the IRS.
Doubt as to collectability is the primary reason why the vast majority of taxpayers request an OIC.
Doubt As to Liability
Doubt as to liability means that you don't think you're 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 debt than to seek an OIC based on this reason. 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
You're claiming that exceptional circumstances would pose a serious economic hardship to you if you were to pay the tax in this case. 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 an extensive narrative of the special and extraordinary circumstances, along with the rest of the offer-in-compromise documentation. 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 best to 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 that you might need to include with your OIC. You should be ready with detailed information about your personal and business finances, including employment, wages, assets, and liabilities. Be sure you're prepared with all 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 upfront, 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.
You should plan on paying your proposed monthly amounts until you hear whether the IRS has accepted or rejected your offer unless you meet the low-income certification guidelines.
The IRS will reject your OIC if you haven't filed all the required tax returns or kept up with your estimated payment obligations. You can't be in bankruptcy proceedings.
Can Form 656 Be E-Filed?
You can't e-file Form 656. You must mail your offer in compromise to the appropriate IRS office with all the required paperwork. But you can set up your payments electronically.
Where To Mail Form 656
Mail your completed Form 656 to the following address if you live in Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, or Washington:
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 on how to file your offer in compromise. Make sure you've filled out all required sections and included any necessary fees and initial payments. 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 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 read IRS Form 656 very carefully before you sign and submit it. The OIC contract sets forth your responsibilities. It explains that any refunds due for a specific tax year will be applied toward your debt until it's paid off. The IRS can and likely will revoke acceptance of your offer. It will reinstate the full amount of your original tax debt if you fail to comply with any of the contractual provisions.
Frequently Asked Questions (FAQs)
What are the chances that the IRS will accept an offer in compromise?
The majority of OIC applications are returned as unprocessable or are rejected. The IRS approved just shy of 32% of OICs it received in 2020. This worked out to about 14,288 approvals among 44,809 applications received.
Does it cost anything to file Form 656?
A required fee of $205 must be submitted with Form 656. You should also make all your proposed OIC payments until you hear back from the IRS about its decision. There's no fee for certain low-income individuals, however, or for those who are filing an OIC for doubt of liability.