Filing an Offer in Compromise

(copied directly from the IRS website)

An OIC is submitted on Form 656, Offer in Compromise. The Form 656 is a complete information package, also containing Forms 433-A and 433-B, Collection Information Statements, as well as instructions and a worksheet. Taxpayers should use the July 2004 version of Form 656.       

The Form 656 was redesigned in 2004 in order to assist taxpayers in the correct preparation of an OIC, as well as reduce the burden associated with the process. The form was last revised in May 2001. The 2004 revision is the culmination of a partnership effort among the IRS, National Taxpayer Advocate, as well as a number of tax professional organizations.

Tax practitioners and the general public should begin using the 2004 revision immediately.

The 2004 revision contains several tax burden reduction features:

• Processability section that allows taxpayers to determine up-front if they are eligible to have their OIC considered before investing any preparation time;
  Handy table of contents;
• Helpful step-by-step outline of the OIC process;
• Expanded Terms and Definition section;
• Form 656-A, Income Certification for OIC Application Fee, and Worksheet, is now included in the Form 656 package. The worksheet helps taxpayers determine whether they meet the income exception to the $150 fee and lessens the chance that taxpayers will forget to attach either the fee or the certification;
• Designated space on the front page of Form 656 where a check or money order for $150 should be attached if the income exception is not met;
• Item 8q which allows the IRS to amend the form to include omitted assessed tax periods and thereby prevent delays in the initial processing of the offer;
• Item 13, paid preparer signature block that asks for the paid preparer’s name, firm’s name, address, signature, Centralized Authorization File, and Employer Identification Number;
• Item 14, Third Party Designee section, which allows a person other than the taxpayer to discuss any information that the IRS needs to process the offer; and
• Helpful summary checklist which reduces the change that the application will be returned by the IRS for omissions.

The paid preparer signature block section (Form 656, Item 13) was suggested by many tax professional organizations. They were concerned with unscrupulous promoters who market the OIC program as a “pennies on the dollar” approach to paying off a tax debt. The signature block should provide an additional safeguard to the public in regards to unscrupulous promoters. 

The information contained on Item 13 will be used to administer and enforce the Internal Revenue laws.  In addition, it may be used to help regulate the practice for those persons subject to Treasury Department’s Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service.

Submitting required documentation with the Form 656 package

If the required documentation is not submitted with Forms 656 and 433-A or 433-B, the IRS will issue one written request to the taxpayer asking for the missing information.  If the information is not provided within 30 days, the OIC case is closed and returned to the taxpayer without the opportunity to appeal the decision.  It is the taxpayer's responsibility to ensure the IRS has the required information to make its determination on an OIC, as well as provide additional information when the IRS requests it.

Form 656, Offer in Compromise

• Form 656, Offer in Compromise (PDF format)
• Form 656, Offer in Compromise (fill-in format) 

Taxpayers are cautioned to complete all items on Form 656.  Here are some common errors that delay OIC processing because the IRS must contact the taxpayer to correct information on Form 656:

• Incorrect Address (don't use P.O. Box, must use street address), Form 656, Item 1.
• Taxpayer identification numbers missing or incorrect on Form 656, Item 2
• EIN not included for an offer on a sole proprietor liability, Form 656, Item 3. 
• Tax liability periods/years missing on Form 656, Item 5.
• Tax periods included where no tax is due, Form 656, Item 5. 
•  Reason for compromise not checked, Form 656, Item 6.
•  No "offer to pay" amount or an inappropriate amount shown on Form 656, Item 7.
• OIC includes joint liabilities without signatures of both parties, Form 656, Item 11
• OIC includes single liabilities, but has signatures of two parties
• OIC submitted by single taxpayer, but includes joint liabilities.

The Form 656 contains a worksheet to assist taxpayers in calculating a correct Offer amount. 

Offer in Compromise (OIC) Application Fee Worksheet

The IRS developed the worksheet to assist taxpayers in determining whether they qualify for the income exception to the $150 fee.  Taxpayers must submit Form 433-A , "Collection Information Statement for Wage Earners and Self-Employed Individuals," found in the Form 656 package, to help determine if they qualify for the exception.

Taxpayers that are not required to submit the fee based on their income level, must complete Form 656-A Income Certification for Offer in Compromise Application Fee  and attach it along with the worksheet to the front of Form 656.

Forms 433, Collection Information Statements

The Forms 433-A and 433-B are included with the Form 656 package. Taxpayers use these forms to submit financial information that is used to determine their ability to pay their tax debt.  Individual taxpayers and self-employed individuals must use Form 433-A, while partnerships and corporations must use Form 433-B.  Note: There will be instances where the IRS may request the 433-A from corporate officers or individual partners.

• Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals (PDF format)
• Form 433-B, Collection Information Statement for Businesses (PDF format)

Taxpayers are cautioned to complete all items on the appropriate Form 433.  Here are some common errors that delay OIC processing because the IRS must contact the taxpayer to correct information on Forms 433:

• Personal and real estate assets, or income and expenses not accurately valued
• Missing or incomplete financial verification documents
• Form submitted, but date of signature is older than six months
• Neglected to complete all sections of the form
• Bankruptcy discharge date is missing 

Collection Financial Standards and Necessary Expenses

Collection Financial Standards are used to help determine a taxpayer's ability to pay a tax debt. The allowed amounts are used in the Form 433-A: 

• National Standards - Allowances for food, clothing and other items, known as the National Standards, apply nationwide except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.
• Local Standards - Maximum allowances for housing and utilities known as Local Standards, vary by location. Unlike the National Standards, taxpayers are allowed the amount actually spent, or the standard, whichever is less.  There are separate allowance amounts for transportation expenses. 
• Necessary Expenses - Necessary Expenses are the allowable payments taxpayers make to support their own and their family's health and welfare and/or the production of income. However, this expense allowance does not apply to business entities.

OIC Payment Plans

There are three payment plans taxpayers and the IRS may agree to:

• Cash  - paid in 90 days or less.
• Short-Term Deferred Payment  - more than 90 days, up to 24 months.
• Deferred Payment  - OICs with payment terms over the remaining statutory period for collecting the tax.

Note: The Worksheet to Calculate an Offer Amount  instructs wage earners and self-employed individuals on how to figure the appropriate amount for a Cash, Short-Term Deferred or Deferred Payment Plan.

Note: The Form 433-A worksheet on page 44 of the Form 656 packet instructs wage earners and self-employed individuals on how to figure the appropriate amount for a Cash, Short-Term Deferred or Deferred Payment Plan.

Frequently Asked Questions

Want more information on what happens after you submit an OIC?  Check the Frequently Asked Questions .

Where to Mail an Offer in Compromise

Form 656 should be mailed to one of two centralized locations where offers are processed Holtsville, NY or Memphis, TN.  Because the original Form 656 is required, facsimile copies of this form cannot be accepted. Where the OIC is submitted is based on where the taxpayer resides and the taxpayer type (wage earner, self-employed, etc.). Check to see where to mail an Offer in Compromise. 

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