IRS Form 656: Offer in Compromise Explained

If you’ve ever opened the Internal Revenue Service (IRS) Form 656 Offer in Compromise booklet, you know it’s not a casual read. One look at those sections, extra forms, and instructions, and you realize it’s more of a process than a form. You’ve got to fill, attach, calculate, sign, and send everything the right way, and the IRS expects it all to line up perfectly.

That’s exactly what this guide is built for. Instead of getting lost in pages of technical lines, you’ll see how to fill each part of Form 656 in a way that’s simple to follow and easy to understand. Every section is explained clearly so you know what to write, where to write it, and what to attach before you send it off.

What Is Form 656?

Form 656 IRS is a form you send to the IRS when you want to settle your tax debt for less than what you owe. It’s part of a process called an Offer in Compromise.

In simple words, it’s a deal you try to make with the IRS. You tell them, “I can’t pay the full amount, but here’s what I can afford.” The IRS then looks at your income, expenses, and what you own to see if your offer makes sense.

You use Form 656 to give the IRS all the details about your offer, like how much you’re offering to pay, why you can’t pay the rest, and how you plan to make the payment (in a lump sum or over time).

If the IRS accepts your offer, it agrees to wipe out the rest of your tax debt once you pay the amount you offered. If they don’t, you still owe the full balance.

You usually send Form 433-A (OIC) if you’re an individual or self-employed and Form 433-B (OIC) if you’re a business owner. These forms show your financial details so the IRS can review your situation before deciding.

How to Fill Out Form 656?

Filling out IRS Form 656 carefully can make a real difference in how smoothly your offer moves through the IRS system. Every entry helps show your financial picture clearly, so the IRS can decide on your offer without delays or confusion. Here is a section-by-section guide to filling out the Form 656:

Section 1: Individual Information (Form 1040 filers)

If you’re sending an Offer in Compromise as an individual, this is where you start. This part tells the IRS who you are, how to contact you, and what kind of taxes your offer covers. Filling it out correctly helps the IRS match your offer to the right tax records.

Who should complete this section?

Fill out this section if you are:

• A Form 1040 filer (U.S. Individual Income Tax Return).
• A self-employed individual with personal business debts.
• Someone with personal liability for excise tax.
• A person responsible for a Trust Fund Recovery Penalty (TFRP).
• An individual is personally responsible for partnership liabilities.

What to include?

Provide the following details clearly:

• First name, middle initial, last name.
• Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
• Physical home address, like street, city, state, ZIP code, and county.
• Mailing address only if it’s different (like a P.O. Box).

If you’ve moved since your last return:

• Tick “Yes” for new address.
• Indicate if the IRS should update its records with the new address.

If you have a small business tied to your name, you can also include your Employer Identification Number (EIN).

Joint offers

If you’re submitting the offer with your spouse:

• List your spouse’s name and SSN/ITIN.
• Both must sign later in the form.

Individual Tax Periods (for individual or sole-proprietor tax debt only)

Here’s where you list each year or period that your offer covers. Be specific so the IRS knows exactly what you’re addressing.

Examples include:

• Form 1040, a U.S. Individual Income Tax Return (e.g., 12-31-2021).
• For the Trust Fund Recovery Penalty, enter the business name and periods (e.g., 03-31-2021).
• Form 941, Employer’s Quarterly Federal Tax Return (list the quarters).
• Form 940, Employer’s Annual FUTA Tax Return (list the years).
• For other federal taxes, write the type and period clearly.

If you need extra space, attach another sheet labeled as “Attachment to Form 656 dated [insert date]” and make sure to sign and date it.

Low-income certification (individuals and sole proprietors only)

You may qualify for Low-Income Certification if your income meets the IRS limit for your family size and location.

If you qualify:

• You don’t need to pay the $205 application fee.
• You don’t need to send any initial payments while your offer is being reviewed.
• The IRS will confirm eligibility using your last filed return or your income from Form 433-A(OIC).

This option helps lower-income taxpayers apply for tax relief without added financial stress.

Important Note →

The IRS cannot settle certain debts through an offer in compromise form 656, such as:

• Restitution amounts assessed by the IRS.
• Tax periods referred to the Department of Justice (DOJ).
• Liabilities under Internal Revenue Code (IRC) § 965(i) or those still covered by a deferral agreement.

Section 2: Business Information (Form 1120, 1065, etc., filers)

If your tax debt belongs to a business instead of you personally, this is where you start. This part helps the IRS match your offer to the right business account and confirm exactly which tax periods you’re trying to settle.

Who should complete this part?

You’ll need to fill this out if your business is a Corporation, Partnership, LLC, or LLP. It’s also needed if you’re submitting the offer on behalf of a company you own or manage.

Information you’ll need to share →

Write down:

• The business name.
• The physical address (street, city, state, ZIP code).
• The mailing address, if it’s different from the physical one.
• The Employer Identification Number (EIN).
• The name and title of your main contact person.
• The business phone number.

If the business address has changed since the last return, tick “Yes” for the new address and mention if you want the IRS to update its records.

You’ll also send a few required items with your offer:

• Form 433-B (OIC) shows the business’s current finances.
• A $205 application fee.
• The initial payment is based on your chosen offer amount.

Business tax periods (for business tax debt only)

Here you list the exact tax years or periods you want the offer to cover. Write them clearly so the IRS knows which filings you’re referring to.

You can include things like:

• Form 1120 U.S. Corporate Income Tax Return (e.g., 12-31-2021).
• Form 941 Employer’s Quarterly Federal Tax Return (e.g., 03-31-2021).
• Form 940 Employer’s Annual FUTA (Federal Unemployment Tax Act) Tax Return (e.g., 12-31-2021).
• Form 1065 U.S. Return of Partnership Income (e.g., 12-31-2021)
• Other federal taxes just specify the type and the period.

If you need more space, you can attach another page titled “Attachment to Form 656 dated [insert date],” and don’t forget to sign and date it.

Section 3: Reason for Offer

This part explains to the IRS why you’re asking to settle your tax debt for less than the full amount. You’ll need to choose only one reason that best fits your situation.

Doubt as to Collectibility

Select this if you don’t have enough income or assets to pay your full tax balance. It means that even if you sold what you own, you still wouldn’t be able to pay it all. The amount you offer should match the minimum calculated on Form 433-A(OIC) or Form 433-B(OIC).

If paying even that minimum would cause hardship, add a short note explaining your situation.

Effective Tax Administration - Economic Hardship

Choose this if you can pay in full, but doing so would cause economic hardship. For example, it may affect your ability to afford necessary living expenses or medical care. Only individuals can select this option.

Include a short explanation of how paying in full would create financial difficulty.

Effective Tax Administration - Public Policy or Equity

Select this if you can pay in full, but collecting the entire amount would be unfair due to unusual circumstances. This option is based on fairness, not hardship.

For example, if a payroll service provider mishandled employee tax payments and you’re being held responsible, this might apply. Add a short explanation describing your situation.

Section 4: Payment Terms

This part tells the IRS how you plan to pay the amount you’re offering. You can choose to make one short series of payments (a lump sum) or spread them out over several months (periodic payments). You must select only one payment method.

Lump sum

Choose this if you can pay your offer in five or fewer payments within five months after the IRS accepts your offer.

• You’ll need to send 20% of your total offer amount upfront unless you qualify for Low-Income Certification.
• The remaining balance can be paid in one or up to five payments after your offer is accepted.

In short, the lump-sum option is best if you can pay most of what you’re offering quickly.

Periodic payment

Choose this if you prefer to pay over time, usually between six and twenty-four months.

• You’ll include the first month’s payment with your form (unless you qualify for Low-Income Certification).
• After that, you’ll continue to make monthly payments on the same date each month until the balance is paid.
• You must keep making these payments while the IRS reviews your offer.

If you qualify for Low-Income Certification, the upfront and monthly payments are paused while the IRS considers your offer.

In both cases, the total offer must be written in whole dollars, and the payment schedule you choose should be realistic based on your financial details.

Section 5: Designation of Payment and Electronic Federal Tax Payment System (EFTPS)

This part helps you tell the IRS how to apply your payments and record them correctly. It also covers how to make payments electronically through the Electronic Federal Tax Payment System (EFTPS) or your Individual Online Account (IOLA).

Designation of payment

If you want your payment to go toward a specific tax year, quarter, or type of tax debt, for example, payroll taxes or a Trust Fund Recovery Penalty, you can mention that here.

If you don’t specify, the IRS will apply your payment where it benefits the government most.

Keep in mind:

• You can’t apply payments submitted with your offer as estimated tax payments for another year.
• If you want to assign future payments (after filing this form), you’ll need to specify the tax year and type of tax each time.
• The application fee or initial payment cannot be designated.

Electronic Federal Tax Payment System (EFTPS) or Individual Online Account (IOLA)

You can also make your offer payments electronically using either EFTPS or IOLA.
In this section, you’ll record:

• The offer application fee and date paid.
• The offer payment amount and date paid.
• The 15-digit electronic funds transfer number for each.

Make sure any payment made electronically is sent the same day you mail or file your offer online.

Section 6: Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements

This part gives the IRS a clear idea of where your payment is coming from and confirms that you’re current with your tax filings and payments. Providing accurate details here helps prevent delays or rejection of your offer.

Source of funds

Here, you’ll mention where you’ll get the money to pay for your offer. Be specific and realistic so the IRS knows your payment plan makes sense. You can include sources such as:

• Personal savings or checking accounts.
• Borrowed money from family or friends.
• Sale of an asset or property.
• Business income or other earnings.

Making your payment

If you’re mailing your offer, send separate checks for the application fee and for your payment.

• Make the checks payable to “United States Treasury.”
• Do not send cash or combine these with any other tax payments.
• Each offer must have its own separate payment and fee.
• You can also pay electronically through the Electronic Federal Tax Payment System (EFTPS) or your Individual Online Account (IOLA).

Your offer may be returned if the application fee or payment isn’t included, or if your check doesn’t clear.

Filing requirements

You must have all required tax returns filed before submitting your offer. If you filed a return recently, you can attach a copy of it; just make sure it’s clearly marked as a copy, not an original.

If you were not required to file a tax return for certain years, indicate so in the space provided on the form.

Tax payment requirements

This confirms that you’re up to date on your current tax payments. You’ll need to show that:

• You’ve made all required estimated tax payments for the current year, or you’re not required to make any.
• If you run a business, you’ve made all federal tax deposits for the current and previous two quarters, or you’re not required to make them.

These details help the IRS verify that you’re compliant before they consider your offer.

Section 7: Offer Terms

By sending this offer, you’re agreeing to certain terms and conditions set by the IRS. These terms outline how your offer will be reviewed, what happens during the process, and what you’re responsible for after acceptance.

Here’s what each clause (a–x) means in simple terms →

(a) You’re asking the IRS to accept the amount listed as full payment for your total tax debt, including penalties and interest.

(b) The IRS can amend or remove tax periods listed if there’s no outstanding liability. Your offer is automatically accepted unless the IRS notifies you otherwise within 24 months.

(c) Payments sent with your offer won’t be returned, even if it’s rejected or withdrawn.

(d) If you qualify for Low-Income Certification, you don’t need to send payments while your offer is reviewed.

(e) Once accepted, the offer settles all liability for those tax years; you can’t file amended returns for them, and the IRS will keep any related refunds.

(f) Your offer doesn’t include money already collected by the IRS, such as levies or seized funds.

(g) The IRS can keep the money it’s already collected or levy your property if needed until the offer is paid in full.

(h) Any funds you submit with your offer are treated as payments toward your tax debt.

(i) Once your final payment is made, the IRS will not return what you’ve already paid.

(j) Your offer becomes pending once the IRS signs it and remains pending until it’s accepted, rejected, or withdrawn.

(k) If rejected, you have 30 days to appeal in writing.

(l) If accepted, you must stay fully compliant and file and pay all taxes on time for five years.

(m) You remain liable for penalties and interest until every condition of the offer is met.

(n) After acceptance, you can’t challenge or reopen the tax debt covered by the offer.

(o) If you fail to follow the terms, the IRS can cancel your offer, file liens, and collect the full balance plus penalties and interest.

(p) You agree to let the IRS extend the time it has to assess or collect your tax while your offer is being considered.

(q) The IRS may file a Notice of Federal Tax Lien on your property during review; it will be released within 45 days after full payment.

(r) You allow the IRS to fix small clerical or typographical errors on your form.

(s) You allow the IRS to contact third parties (like banks or employers) to verify your information, and may allow a credit report.

(t) If your offer covers a joint liability, it applies only to your share. It doesn’t release the other person’s responsibility.

(u) If you owe a Shared Responsibility Payment (for not having health coverage), it’s treated as tax debt until it’s paid in full.

(v) The IRS must make certain accepted offers public for one year, including your name, city, state, ZIP, amount owed, and offer terms.

(w) If you use the IRS Secure Messaging system, you agree to get updates and final decisions there.

(x) If you and your spouse file a joint offer, it remains joint unless both of you later submit amended Forms 656 to separate them.

Section 8: Signatures

This is where you officially sign and confirm that everything in your offer in compromise is true and complete. Without signatures, your form isn’t valid, so double-check before sending it.

What to fill out?

Once you reach the signature section, the IRS is simply confirming who is legally responsible for the information in the form. This is where you formally certify that everything submitted is accurate and complete.

• Signature of taxpayer or business owner: Write your full name (or your business name if you’re a corporation). Add your phone number and the date you’re signing.
• Signature of spouse or authorized corporate officer (if applicable): If this is a joint offer or a corporate submission, the second person must also sign. They’ll need to include their phone number and date as well.

Optional authorization

You’ll see a small box under each signature line.

If you check this box, you’re giving the IRS permission to leave detailed voice messages about your offer on the phone number you provided.

Important Note →

By signing here, you’re declaring under penalty of perjury that all the information and supporting documents you’ve submitted are true, correct, and complete to the best of your knowledge.

Section 9: Paid Preparer Use Only

If you hired a tax professional to help you fill out your Offer in Compromise, this is where they complete their part. It’s basically their sign-off showing that everything in your form is accurate.

• Signature and contact details: The preparer signs and adds their phone number and the date. If they’d like, they can tick the small box to let the IRS leave detailed messages about your offer on voicemail.
• Identification information: They’ll include their full name, Preparer Tax Identification Number (PTIN) or Centralized Authorization File Number (CAF), and the name and address of their firm. If they work for themselves, they can simply list their own business address.
• If you want representation: To let someone represent you before the IRS while your offer is being reviewed, attach the Form 2848 (Power of Attorney and Declaration of Representative). This allows your representative to communicate with the IRS and receive any needed confidential information. If you only want a person to receive updates or information but not actually represent you, attach Form 8821 (Tax Information Authorization) instead.
• IRS use only: At the very bottom, there’s a space that the IRS fills out after reviewing your offer. The authorized IRS official signs here to confirm that they’ve accepted the legal time waiver mentioned earlier in Section 7(p).

Other Forms in the 656 Booklet

Inside the formal Form 656 B (Offer in Compromise booklet), you’ll find more than just the IRS Offer in Compromise Form 656 itself. These extra forms help you show your finances and choose the right path for your offer.

Here’s a breakdown of what else you’ll get:

• Form 433-A (OIC) for individuals and self-employed to report income, expenses, assets, and debts.
• Form 433-B (OIC) for business owners to report business financials.
• IRS 656 Form is the main offer form you fill out to propose the compromise.
• Form 656-L is used if you’re disputing that you owe the tax (doubt as to liability).
• Form 656-PPV (Periodic Payment Voucher) is a voucher you use when your offer payment plan is over several months.

Get Help With Form 656!

Filling out Form 656 isn’t a simple do-it-yourself job. It’s not just one form; it’s multiple forms, each with its own document requirements. You’ll need proof of income, assets, expenses, supporting records, and more, and missing even one detail can cause the IRS to reject your offer.

All this can be handled easily when you have an IRS tax specialist by your side.

Mr. Michael Sullivan, a former IRS agent, knows the process inside out because he once sat on the other side, the side that reviews and decides your offer. And he’s not doing it alone. He’s backed by a full team of attorneys, Certified Public Accountants (CPAs), Enrolled Agents (EAs), Certified Tax Resolution Specialists (CTRSs), and Masters of Business Administration (MBAs) who bring 250 years of cumulative direct IRS experience.

Don’t risk rejection or costly delays; get in touch with Michael D. Sullivan Tax Group today.