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IRS Form 656

Offer in Compromise

Form 656 is the IRS Offer in Compromise — your written settlement proposal. It must be filed together with Form 433-A (OIC) (the financial disclosure) and a non-refundable application fee plus a down payment. The IRS rejects roughly two-thirds of Offers in Compromise, often because the offer amount was below the IRS's calculated 'reasonable collection potential.'

Who Files This

Taxpayers with significant federal tax debt who cannot reasonably pay the full amount through an installment plan within the collection statute, or where collecting in full would cause economic hardship.

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Legally reviewed byGregory McCauley Jr., Esq.

Tax Attorney · Villanova University School of Law · Admitted in Delaware, New Jersey, United States Tax Court

Last reviewed

What's at Stake With Form 656

Filing Form 656 extends the IRS Collection Statute Expiration Date (CSED) — meaning the 10-year clock pauses while the offer is pending plus 30 days. Filing without strategy can actually extend the IRS's collection window without producing a settlement.

How to File Form 656 Correctly

  1. 1
    Calculate the IRS's Reasonable Collection Potential (RCP)

    RCP = net equity in assets + future monthly income × 12 (lump sum) or × 24 (periodic). Your offer must equal or exceed this number to be considered.

  2. 2
    Choose lump sum vs. periodic payment

    Lump sum requires 20% down with the offer; periodic requires monthly payments during evaluation. Each has different math.

  3. 3
    File Form 433-A (OIC) and supporting documents

    Three months of bank statements, pay stubs, and proof of every expense. Missing documentation is the #1 cause of return without consideration.

  4. 4
    Submit application fee and down payment

    Currently $205 application fee plus the required down payment. Low-income certification waives the fee.

  5. 5
    Stay compliant for 5 years after acceptance

    If you fall out of compliance — late return, new balance — the offer defaults and the original liability returns in full.

Why File Form 656 With a Tax Attorney

Attorney-Client Privilege

Once you sign IRS paperwork, every fact you disclosed becomes evidence. Privilege protects the conversation before you commit.

We Know the IRS Standards

Collection Financial Standards, RCP math, and ACS vs. Field Collection rules change what number you should put on this form.

We Catch the Traps

Direct-debit triggers, dissipated-asset addbacks, AMT preference items — most of the cost of these forms is in what you didn't know to negotiate.

Real Legal Representation

If the IRS rejects, defaults, or audits you off this form, we represent you through Appeals, Tax Court, or U.S. District Court.

Call (877) 829-5267

Costly Mistakes With Form 656

Offering an amount below the IRS's Reasonable Collection Potential — automatic rejection.

Missing the 20% down payment on lump-sum offers.

Failing to file all required prior-year returns before submitting the offer.

Filing without first ruling out simpler options like Currently Not Collectible.

Frequently Asked Questions About Form 656

What percentage of Offers in Compromise are accepted?

Historically the IRS accepts roughly 30-40% of OICs filed. Acceptance rates jump significantly when prepared by an experienced tax attorney who calculates RCP correctly.

Can the IRS keep my refund if I file an Offer in Compromise?

Yes — the IRS keeps any refund for the year the offer is accepted, and that amount does not reduce the offer.

How long does an Offer in Compromise take?

Typical processing time is 6-12 months. The IRS pauses collection during evaluation, but interest and penalties keep accruing on the original liability.

Primary Sources & Authority

We cite the underlying IRS publications and statutes so you can verify everything on this page.