IRS Form 656 “Offer in Compromise” Explained

IRS Form 656, Offer in Compromise, is the application used to ask the IRS to settle your tax debt for less than the full amount owed. The IRS accepts an offer when it’s the most it can reasonably expect to collect within a reasonable time, or in a few other limited situations.

Three Grounds for an Offer

• Doubt as to collectibility: the most common. Your assets and future income aren’t enough to pay the balance in full before the collection statute expires.
• Doubt as to liability: you have a genuine dispute that you owe the tax. This uses Form 656-L.
• Effective tax administration: you could technically pay, but doing so would create economic hardship or would be unfair because of exceptional circumstances.

Basic Eligibility

Before the IRS will consider an offer, you generally must have filed all required tax returns, made required estimated payments for the current year, and (for business owners with employees) made current federal tax deposits. You also can’t be in an open bankruptcy case. The IRS’s online Offer in Compromise Pre-Qualifier is a useful first check. See also Offer in Compromise Eligibility.

How the Offer Amount Is Calculated

The IRS calculates your reasonable collection potential (RCP): the net equity in your assets plus a set number of months of your future disposable income. For a lump-sum offer (paid in five or fewer installments) that’s 12 months of income, and for a periodic payment offer it’s 24 months. Your finances are documented on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, which are filed with Form 656.

Fees and Payments

• A nonrefundable application fee, which is waived for qualifying low-income taxpayers
• An initial payment: 20% of the offer amount for lump-sum offers, or the first proposed monthly payment for periodic offers. You keep making the monthly payments while the offer is under review.

Check the current fee in the latest Form 656-B booklet.

What to Expect

• Collection by levy generally stops while the offer is pending, but interest continues and the collection statute is extended.
• The IRS keeps any refunds for the year the offer is accepted and earlier years.
• If accepted, you must file and pay on time for five years, or the offer can be defaulted.
• If rejected, you have 30 days to appeal using Form 13711.

Get Help From Diehl CPA

IRS collection and appeal procedures have strict deadlines, and what you submit becomes part of the record. Diehl CPA, led by Mark Diehl, CPA, CFE, represents taxpayers before the IRS and can prepare the forms, gather the documentation, and deal with the IRS for you. Learn about our tax relief services or contact us to talk through your situation.

This article is general information, not tax or legal advice for your specific situation. Updated October 2026.