Offer in Compromise (OIC)

Who Files Form 656

Taxpayers with assessed federal tax debt who cannot pay the full balance through reasonable installment payments and can demonstrate that paying in full would cause economic hardship. The IRS evaluates the offer against the taxpayer's Reasonable Collection Potential (RCP).

What Form 656 Reports

Form 656 is filed with detailed financial disclosure on Form 433-A (OIC) for individuals or 433-B (OIC) for businesses. The IRS computes RCP based on net realizable equity in assets plus future income (12-24 months depending on payment plan). Offers can be paid as a lump sum (within five months of acceptance) or as periodic payments (up to 24 months).

Key Deadlines

• No filing deadline: submit when financially appropriate after assessment
• Once submitted, the IRS suspends most collection activity while the offer is pending
• Accepted OIC requires five years of compliance: defaulting reinstates the original debt

Common Mistakes

• Submitting an offer when an installment agreement would have been faster and lower-cost
• Underestimating Reasonable Collection Potential by missing assets or income
• Defaulting on an accepted OIC by failing to file or pay timely for 5 years afterward
• Missing the application fee or initial payment requirements

Best Practices

• Run the Reasonable Collection Potential (RCP) analysis before submitting. Submitting an offer below RCP is rejected; submitting at or above RCP is generally accepted.
• File all required tax returns BEFORE submitting. The IRS rejects OICs from non-filers without exception.
• Pay the application fee and required initial payment. Low Income Certification (Form 656 page 1) waives both for taxpayers below the LIC threshold.
• Stay compliant for the full 5 years after acceptance. Missing a return or payment defaults the OIC and reinstates the original debt.
• When OIC is rejected, appeal within 30 days to IRS Office of Appeals. Many initially rejected offers are accepted on appeal with revised RCP analysis.

Source: Official Form 656 information at IRS.gov