What Is the Form 656 Booklet and How to File It?

The Form 656 Booklet is the application package used to propose an Offer in Compromise (OIC) to the Internal Revenue Service (IRS). An OIC is an agreement that allows certain taxpayers experiencing significant financial difficulty to resolve their federal tax liability for less than the full amount owed. The booklet contains the main application, detailed instructions, and the financial disclosure forms the IRS needs to evaluate the offer. It guides the applicant through calculating a proposed offer amount based on what the IRS can reasonably expect to collect from the taxpayer’s assets and income.

Determining Eligibility for an Offer in Compromise

Before starting the paperwork, a taxpayer must meet several preliminary requirements. The IRS will not process an OIC unless the applicant is current on all tax filings and payments. This includes:

• Filing all required tax returns.
• Receiving a bill for at least one tax debt included in the offer.
• Making all required estimated tax payments for the current year.
• Making all required federal tax deposits for the current and two preceding quarters (for business owners with employees).

An OIC application will also be rejected if the taxpayer is in an open bankruptcy proceeding.

Beyond these compliance checks, the IRS considers an OIC under three circumstances. The most common is “Doubt as to Collectibility,” which applies when a taxpayer’s income and assets are insufficient to pay the full tax debt. Another basis is “Doubt as to Liability,” used when a taxpayer can show a legitimate reason to doubt they owe the tax; this requires Form 656-L. The third basis is “Effective Tax Administration,” which applies when paying the full amount would cause economic hardship or be unfair due to exceptional circumstances. The IRS provides an online OIC Pre-Qualifier Tool to help taxpayers get a preliminary assessment of their eligibility.

Information and Documentation Required for the Booklet

The core of the package is Form 656, Offer in Compromise, and a detailed financial statement. Individuals use Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, while businesses use Form 433-B (OIC), Collection Information Statement for Businesses. It is important to download the most current version of the Form 656-B booklet from the IRS website to avoid delays.

Applicants must provide comprehensive details about their finances, including:

• All sources of monthly income, such as wages, self-employment earnings, and social security benefits.
• Monthly living expenses, which are compared against IRS national and local standards for costs like housing and food.
• The current value of all assets, including cash, bank accounts, investments, retirement accounts, vehicles, and real estate.
• All liabilities, such as mortgages, car loans, and credit card debt.

This financial data allows the IRS to calculate the taxpayer’s reasonable collection potential (RCP), which is the net realizable equity in assets plus future income potential. This RCP figure forms the basis for the minimum offer the IRS will likely accept. On Form 656, the taxpayer states the total offer amount and chooses a payment option, either a lump sum or periodic payments.

A $205 application fee and an initial offer payment must be included. For a lump-sum offer, this payment is 20% of the total offer amount; for a periodic payment offer, it is the first month’s payment. Taxpayers who meet low-income criteria can request a waiver for these costs by completing the Low-Income Certification section in the booklet.

Submitting the Completed Form 656 Booklet

Once all forms are completed and documents are gathered, assemble the application package for submission. The package must include the signed Form 656, the completed Form 433-A (OIC) or 433-B (OIC), all required payments, and photocopies of supporting financial documents. Do not send original documents, as they will not be returned.

The completed package must be mailed to the designated IRS location, which depends on the taxpayer’s state of residence. The Form 656-B booklet provides the specific mailing addresses for the two IRS processing sites. An incomplete package, such as one with missing forms or payments, will result in the IRS returning the application without review. This requires the taxpayer to correct the errors and restart the submission process.

The IRS Review Process

After submission, the IRS first checks the application for basic eligibility and completeness. An employee verifies that all forms are included and signed and that the necessary payments were made. If these preliminary requirements are not met, the application is returned, and the application fee is refunded; however, the initial offer payment is kept and applied to the tax debt. This action cannot be appealed.

Once an application is accepted, it is assigned to an OIC examiner for a thorough investigation. The examiner will review bank statements, pay stubs, and other documentation to verify the financial information provided. They may contact the taxpayer for clarification or additional information and will independently calculate the taxpayer’s reasonable collection potential to determine if the offer is appropriate.

The review process leads to one of three outcomes. The offer may be accepted, and the taxpayer will receive a letter detailing the agreement’s terms. The IRS may also reject the offer, providing a written explanation and informing the taxpayer of their right to appeal. In some cases, the IRS may return an offer it deems too low with a counteroffer, which the taxpayer can then accept or decline.