IRS Form 656 Instructions: Eligibility, Offer Amount, and Payment

IRS Form 656 is the application for an Offer in Compromise, the agreement that lets you settle a federal tax debt for less than the full amount owed. Following the IRS Form 656 instructions correctly means confirming you’re eligible, calculating an offer amount the IRS will actually consider, backing every figure with documentation on Form 433-A or 433-B, filling in the form itself, and mailing the complete package with the $205 application fee and required initial payment to the correct processing center. Miss any step and the IRS will return the application, keep the initial payment, and leave you months behind where you started.¹

Confirm You’re Eligible Before You File

The IRS will reject your application on procedural grounds if any of the following aren’t true, regardless of how tight your finances are:¹

Every tax return you were legally required to file has been filed.
You’ve received a bill for at least one of the tax debts you want to compromise. You cannot submit an offer on a liability the IRS hasn’t yet assessed.
Your estimated tax payments for the current year are up to date.
If you have employees, all federal tax deposits for the current quarter and the two preceding quarters have been made.
You are not in an open bankruptcy proceeding.

The IRS Pre-Qualifier Tool at irs.treasury.gov/oic_pre_qualifier runs you through these checks and produces a preliminary estimate of what your offer would need to be.² The estimate isn’t binding on the IRS, but it will keep you from preparing a full application that has no chance of acceptance.

Pick the Right Grounds

Federal law authorizes an Offer in Compromise on three grounds, and Section 2 of Form 656 asks you to identify which one applies.³

Doubt as to Collectability is the most common ground. It applies when your assets and future income cannot pay the tax debt in full within the time the IRS has to collect (generally ten years from assessment).⁴

Effective Tax Administration is for situations where you technically could pay in full but doing so would create serious economic hardship or would be unfair given exceptional circumstances such as serious illness or disability. The IRS treats this as a narrow category.

Doubt as to Liability applies when you dispute that you actually owe the tax. This ground uses a different application: Form 656-L, not Form 656.⁵ If your issue is whether the tax is correct, stop here and use Form 656-L instead.

Your chosen basis has to match the financial picture in the rest of the application. Claiming Doubt as to Collectability while your Form 433-A shows plenty of equity and disposable income will contradict itself and get you rejected.

Calculate Your Minimum Offer Amount

For a Doubt as to Collectability offer, the IRS will not accept less than your Reasonable Collection Potential (RCP), the total it estimates it could collect from your assets and future income.⁴ Calculate this before you fill in an offer amount on the form.

The first piece is net asset equity. For most assets, the IRS uses quick sale value, which is 80% of fair market value, and then subtracts what you owe on the asset.⁶ A home worth $200,000 with a $150,000 mortgage contributes $10,000: 80% of $200,000 is $160,000, minus the $150,000 balance. Do this for every asset: real estate, vehicles, bank and investment accounts, retirement accounts, and life insurance with cash surrender value.

The second piece is future income: monthly income minus allowable monthly expenses, multiplied by 12 for a lump sum offer or 24 for a periodic payment offer. If the remaining collection period is shorter than the applicable multiplier, use the remaining months.⁶

Add the two together. With $10,000 in net equity and $500 in monthly disposable income, a lump sum offer needs at least $16,000; a periodic payment offer needs at least $22,000. Offering less almost always draws a rejection.

Complete Form 433-A or 433-B

Form 656 rests on the Collection Information Statement. Wage earners and self-employed individuals use Form 433-A; businesses use Form 433-B.⁷ If you’re submitting both an individual and a business offer, each requires its own Form 656.¹

Every figure needs backup. The examiner assigned to your case cross-checks entries against public records and third-party data, and gaps between what you report and what those sources show slow or sink the application.

Income. Document every source of household income for the three most recent months: pay stubs, 1099s, Social Security statements, rental income, and any other regular payments. Missing a source deflates your disposable income calculation artificially and raises the examiner’s suspicion when it turns up in their verification.

Assets. Include real estate, vehicles, all bank and investment accounts, retirement accounts, and life insurance policies with cash value. Real estate requires a current appraisal or comparable market analysis and documentation of mortgages or liens.⁸ Retirement accounts must be disclosed even though the IRS applies special rules to how their value counts. For life insurance, use cash surrender value minus any policy loans.

Expenses. The IRS caps most expense categories with published National and Local Standards; you get the lesser of what you actually spend or what the standard allows.⁹ For national categories like food and clothing, the standard for your household size is allowed without questioning what you actually spend.¹⁰ Housing and utilities are local and vary by county. The IRS postponed the update usually scheduled for April 2025, so the standards published on April 21, 2025 remain in effect until June 2026.¹¹ If your actual necessary expenses exceed the standards, deviations are possible but you have to document that the standard leaves you unable to meet basic needs.

Fill In Form 656 Section by Section

The form is short, but each entry has to line up with the financial statement behind it.

Section 1 identifies the tax debts you want to compromise. List each tax form (Form 1040, for example) with the specific tax period. Multiple years must each be listed separately.

Section 2 is the grounds selection: Doubt as to Collectability, Effective Tax Administration, or both. Your Form 433 must support the choice.

Section 3 is your offer amount and payment terms. This is where the RCP calculation you did earlier becomes the number on the page, and where you commit to a payment option.

Every signature line on the form must be signed and dated. An unsigned Form 656 is returned without processing.¹²

Choose Lump Sum or Periodic Payment

The payment option changes your upfront payment, your future income multiplier, and your obligations while the IRS reviews the offer.³

Lump Sum Cash

You pay the total offer in five or fewer installments within five months of acceptance. Include 20% of the offer amount as an upfront payment with the application. That payment is nonrefundable and applies to your tax debt whether or not the offer is accepted.⁴ Because the RCP uses a 12-month multiplier here, the minimum offer is typically lower than under the periodic option.

Periodic Payment

You spread the total over 6 to 24 monthly installments after acceptance. Include your first proposed monthly installment with the application, and keep making those monthly payments throughout the review. Missing a payment during review can be treated as a withdrawal of the offer. The multiplier is 24 months, so the minimum offer runs higher, but monthly amounts are smaller.

Low-Income Certification

If your adjusted gross income on your most recent return, or your household’s gross monthly income from Form 433-A multiplied by 12, falls at or below the applicable threshold, low-income certification waives both the $205 application fee and any required initial payment.¹² For 2026, the threshold for one person in the 48 contiguous states is $37,650, rising to $51,100 for a household of two and $78,000 for a household of four, with $13,450 added for each person beyond eight. Alaska and Hawaii have higher thresholds. Business entities other than sole proprietorships do not qualify for the waiver.¹³

Know What You’re Agreeing To

Sections 4 through 10 of Form 656 are the terms you accept by signing. Two of them regularly catch filers off guard.

Submitting an offer suspends the IRS collection statute of limitations. The ten-year clock stops while the offer is pending, stays paused for an additional 30 days after a rejection, and remains paused through any appeal.¹⁴ A year-long review that ends in rejection effectively adds a year to how long the IRS can collect. If your collection period is close to expiring, weigh that before filing.

The IRS keeps any refund due for tax periods assessed before your offer is accepted, and you agree not to file amended returns for the listed tax years while the offer is pending or after it’s accepted.¹³

Mail the Complete Package to the Right Center

The full submission includes Form 656, Form 433-A or 433-B, supporting financial documentation, the $205 application fee (unless waived), and the required initial payment. Make checks payable to “United States Treasury.”

The IRS uses two OIC processing centers, and your state of residence determines which:¹³

Memphis IRS Center COIC Unit, P.O. Box 30803, AMC, Memphis, TN 38130-0803 for Arizona, California, Colorado, Georgia, Hawaii, Idaho, Kentucky, Louisiana, Mississippi, New Mexico, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, and Washington.
Brookhaven IRS Center COIC Unit, P.O. Box 9007, Holtsville, NY 11742-9007 for all other states, the District of Columbia, Puerto Rico, and foreign addresses.

Mailing to the wrong center can cause procedural rejection. Send by certified mail with return receipt so you have proof of both mailing date and delivery.

After You Mail It

The IRS sends a letter acknowledging receipt once the package is accepted for processing. From that point, most collection activity is suspended: the IRS generally cannot levy your property or garnish wages while the offer is pending.¹⁴ An examiner verifies your figures against public records and the documents you submitted and will likely request clarification on specific items. Respond quickly; slow responses stretch the review and read as a lack of cooperation.

If your offer is accepted, you’re bound to a five-year compliance period: every required federal return filed on time and every federal tax paid in full. You cannot request an installment agreement or submit another offer for any tax liability during that window.¹⁵ A default restores the original debt in full, adds back accrued interest, keeps the payments you already made, and reopens collection on the remainder.

If your offer is rejected, you have 30 days from the rejection letter to request an appeal with the Independent Office of Appeals, using Form 13711 or a written letter mailed to the office that sent the rejection.¹⁶ The collection suspension continues through the appeal. Miss the 30 days and you’d have to start over with a new Form 656, a new application fee, and a new initial payment.

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Internal Revenue Service. Offer in Compromise
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Internal Revenue Service. Offer in Compromise Pre-Qualifier
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Office of the Law Revision Counsel. 26 U.S. Code 7122 – Compromises
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Internal Revenue Service. Topic No. 204, Offers in Compromise
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Internal Revenue Service. Form 656-L, Offer in Compromise (Doubt as to Liability)
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Internal Revenue Service. IRM 5.8.5 Financial Analysis
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Internal Revenue Service. Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals
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Internal Revenue Service. Offer in Compromise – Disagreed Items
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Internal Revenue Service. Collection Financial Standards
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Internal Revenue Service. National Standards: Food, Clothing and Other Items
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Internal Revenue Service. Local Standards: Housing and Utilities
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Internal Revenue Service. Form 656 – Offer in Compromise
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Internal Revenue Service. Form 656 Booklet Offer in Compromise
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Office of the Law Revision Counsel. 26 U.S. Code 6331 – Levy and Distraint
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Internal Revenue Service. Internal Revenue Manual 5.19.7 – Monitoring Offer in Compromise
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Internal Revenue Service. Appeal Your Rejected Offer in Compromise (OIC)