IRS Form 656
Offer in Compromise
Form 656 is the IRS application used to settle federal tax debt for less than the full amount owed through an Offer in Compromise.
- Form
- Form 656
- Who files
- Individuals or businesses who cannot pay the full balance and qualify under doubt as to collectibility
- Last reviewed
- 2025
Official IRS PDF - Purpose
- The application used to settle IRS tax debt for less than the full amount owed.
- Who files
- Individuals or businesses who cannot pay the full balance and qualify under doubt as to collectibility, doubt as to liability, or effective tax administration.
- When used
- Submitted along with Form 433-A (OIC) or 433-B (OIC), application fee, and initial payment.
Related services
What Form 656 actually does
Form 656, Offer in Compromise, is the IRS application taxpayers use to propose settling a federal tax debt for less than the full amount owed. The IRS accepts an Offer in Compromise (OIC) only when the proposed amount is at least the taxpayer's Reasonable Collection Potential — generally the value of available assets plus future income — calculated on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
There are three legal grounds for an OIC: doubt as to collectibility (you cannot pay the full balance before the collection statute expires), doubt as to liability (you do not actually owe the assessed amount), and effective tax administration (paying in full would create economic hardship or be inequitable). Doubt as to collectibility is by far the most common.
A complete OIC package includes Form 656, the appropriate Collection Information Statement (433-A OIC or 433-B OIC), the $205 application fee unless you qualify for the low-income waiver, and the initial payment (20% for lump-sum offers, the first monthly payment for periodic offers). Sending an incomplete package is the most common reason offers are returned without consideration.
How to file Form 656, step by step
- 01
Confirm you're compliant first
The IRS will not consider an OIC if you have unfiled returns or have not made required estimated payments or federal tax deposits. File every missing return and get current on estimates before submitting Form 656.
- 02
Run the Reasonable Collection Potential numbers
Complete Form 433-A (OIC) or 433-B (OIC) honestly. The IRS will recalculate your RCP using its own allowable expense standards — if your offer is below that figure it will be rejected.
- 03
Choose your payment option
Lump-sum cash (paid in 5 or fewer installments within 5 months of acceptance) requires a 20% down payment with the offer. Periodic payment offers (paid over 6-24 months) require the first monthly payment with the application and continued monthly payments while the IRS evaluates.
- 04
Pay the application fee or claim the waiver
Include the $205 application fee with Form 656. Low-income taxpayers (at or below 250% of federal poverty guidelines) may check the Low Income Certification box on the form and skip both the fee and the initial payment.
- 05
Mail the complete package
Send Form 656, Form 433-A (OIC) or 433-B (OIC), all required supporting documents (pay stubs, bank statements, vehicle titles, etc.), the application fee check, and the initial payment to the correct IRS OIC processing center for your state (Memphis or Brookhaven — see the Form 656 instructions).
- 06
Stay compliant while the offer is pending
Continue filing and paying all current taxes on time. The IRS typically takes 6-12 months to make a decision. The 10-year collection statute is suspended while the offer is pending plus 30 days.
Mistakes that get Form 656 rejected
Related IRS forms
Form 656 — frequently asked questions
How much will the IRS accept?+
The IRS will accept the offer if it is at least equal to your Reasonable Collection Potential (RCP) — the net realizable value of your assets plus your future income for either 12 months (lump-sum) or 24 months (periodic). Anything less than RCP is rejected unless you qualify under doubt as to liability or effective tax administration.
How long does the IRS take to decide?+
Most offers are resolved within 6-12 months. By statute, if the IRS has not made a decision within 24 months, the offer is deemed accepted.
What happens if my offer is rejected?+
You have 30 days to file an Appeal using Form 13711. The $205 application fee is generally non-refundable, but initial payments are applied to your tax liability.
Will the IRS still file a tax lien?+
The IRS typically will not file a Notice of Federal Tax Lien while an offer is pending unless one already exists or collection appears at risk. Liens are generally released within 30 days of paying the accepted offer in full.
Can I appeal a returned offer?+
No — a returned offer (one not processed because it was incomplete) cannot be appealed. You must correct the deficiencies and submit a new Form 656 with a new application fee.
Need help with Form 656?
A CPA can prepare and file Form 656 correctly the first time — and represent you through whatever follows.
More IRS forms
Form 433-A
Collection Information Statement (Individuals)Form 433-B
Collection Information Statement (Businesses)Form 2848
Power of Attorney and Declaration of RepresentativeForm 8821
Tax Information AuthorizationForm 9465
Installment Agreement RequestForm 12153
Request for a Collection Due Process or Equivalent HearingForm 8857
Request for Innocent Spouse ReliefForm 843
Claim for Refund and Request for AbatementForm 4180
Report of Interview with Individual Relative to TFRP
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