IRS Form 656-B Guide: Offer in Compromise Booklet Rules

1. Introduction – What is Form 656-B?

IRS Form 656-B, officially titled the Offer in Compromise Booklet, is a comprehensive instructional package and application booklet governed by the Internal Revenue Service (IRS). It contains all the necessary forms, eligibility checklists, and financial calculation worksheets required to apply for a federal tax debt settlement.

Unlike standard standalone tax returns, Form 656-B is an all-in-one guide designed to walk individual and business taxpayers through the complex process of settling federal tax liabilities for less than the full amount owed.

The booklet includes the core legal agreement form (Form 656), along with detailed financial disclosure statements for individuals (Form 433-A (OIC)) and businesses (Form 433-B (OIC)), providing a complete blueprint for tax resolution.

2. Purpose of the Form

The primary purpose of Form 656-B is to provide taxpayers with a standardized, structured framework to determine if they qualify for an Offer in Compromise (OIC) under federal tax law. It ensures that applicants meet strict statutory eligibility requirements before submitting a formal settlement request.

Form 656-B solves the challenge of navigating complex IRS collection and financial standards. Preparing a tax settlement requires calculating your Reasonable Collection Potential (RCP)—a formula combining net asset equity and disposable cash flow. Form 656-B provides step-by-step worksheets to calculate this number accurately.

Additionally, the booklet protects taxpayers from submitting defective applications. By incorporating eligibility checklists and low-income qualification guides, Form 656-B helps taxpayers avoid unnecessary application fees and processing delays.

3. Who Needs to File This Form

Form 656-B is used by individual taxpayers, self-employed workers, sole proprietors, and business entities (corporations, partnerships, LLCs) that owe back federal taxes and are applying for an Offer in Compromise.

You should utilize Form 656-B if you plan to submit a settlement offer under either of these legal grounds:

• Doubt as to Collectibility: You do not have sufficient asset equity or monthly disposable income to pay your total federal tax balance before the 10-year statutory collection limit expires.
• Effective Tax Administration (ETA): You technically have enough assets or income to pay the full tax liability, but doing so would cause severe economic hardship or be exceptional and inequitable.

4. Who Is Exempt / Not Required to File

Form 656-B is an optional settlement application booklet, but specific legal disqualifications prevent certain taxpayers from using it.

You should NOT use Form 656-B if you fit into any of the following categories:

• Offers Based Solely on Liability Disputes: Taxpayers who claim they do not legally owe the tax do not use Form 656-B; they must use Form 656-L (Doubt as to Liability) instead.
• Taxpayers in Active Bankruptcy: Anyone currently involved in active bankruptcy proceedings is legally barred from filing an Offer in Compromise.
• Non-Compliant Taxpayers: Individuals or businesses with unfiled prior-year tax returns or missing current quarterly employment tax deposits.
• Taxpayers Able to Pay in Full: Anyone who can pay their federal tax liability in full through existing liquid cash, asset equity, or a standard monthly installment agreement.

5. When to File

Form 656-B is an event-based application package submitted when a taxpayer meets all IRS pre-qualification standards and is fully tax compliant.

Keep these primary submission rules in mind:

• After Achieving 100% Tax Compliance: File the application package only after filing all required prior-year tax returns and making all required current estimated tax or payroll deposits.
• Before Severe Asset Enforcement: Submit the application as early as possible after back taxes are assessed to prevent bank levies or wage garnishments.
• Current Financial Window: Ensure all financial disclosures and bank statements in the packet reflect current financial figures (within 30 to 60 days of mailing).

6. Where and How to File

Form 656-B contains physical paper forms that must be completed, assembled, and mailed directly to the IRS. Standalone digital or online e-filing is not available for Offer in Compromise application packages.

Assemble your completed Form 656, financial statement (Form 433-A (OIC) or Form 433-B (OIC)), required application fee check ($205), initial offer payment check (unless Low-Income Certified), and supporting financial documents into one package. Mail the complete packet to the dedicated IRS Offer in Compromise processing center address listed in the Form 656-B instructions based on your state of residence.

7. Step-by-Step Instructions to Fill the Form

Form 656-B outlines a structured 6-step process to prepare and submit your Offer in Compromise application package. Review the summary guide below.

Process Step	Step Title	Key Actions to Take
Step 1	Pre-Qualification Check	Verify filing compliance, confirm no active bankruptcy, and check estimated tax deposits.
Step 2	Financial Statement	Complete Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses to compute asset equity and disposable cash flow.
Step 3	Form 656 Completion	Complete taxpayer details, list specific tax periods, select payment option (Lump Sum vs. Periodic), and check Low-Income box if applicable.
Step 4	Application Fee & Payment	Attach $205 fee and initial offer payment (unless Low-Income Certified).
Step 5	Documentation Gathering	Attach 3 consecutive months of bank statements, pay stubs, expense bills, and asset proof.
Step 6	Package & Submission	Mail the complete physical package to the designated IRS submission center address.

Step 1 – Pre-Qualification Verification

Before filling out forms, review the booklet’s pre-qualification checklist. Confirm that all past tax returns are filed, current tax deposits are up to date, and you are not currently in bankruptcy proceedings.

Step 2 – Financial Statement and Minimum Offer Calculation

Complete the included financial disclosures: Form 433-A (OIC) for wage earners and self-employed individuals, or Form 433-B (OIC) for corporate business entities. These worksheets calculate your Reasonable Collection Potential (RCP) by combining net asset equity (Quick Sale Value) and disposable monthly income. This yields your non-negotiable Minimum Offer Amount.

Step 3 – Completing Form 656

Fill out Form 656. Explicitly list every tax form number (e.g., 1040, 941) and specific tax year or quarter to be settled. Select your payment structure:

• Lump Sum Cash Offer: 20% down with application, balance paid in 5 or fewer installments within 5 months of acceptance.
• Periodic Payment Offer: First monthly payment with application, continuing monthly payments over 6 to 24 months until paid in full.

Step 4 & 5 – Fee Waivers and Document Gathering

If household income is at or below 250% of federal poverty guidelines, complete the Low-Income Certification section to waive the $205 application fee and initial payments. Otherwise, attach checks for the $205 fee and initial payment. Gather 3 consecutive months of complete bank statements, pay stubs, utility bills, and mortgage records.

8. Required Documents/Information Needed Before Filling

The IRS immediately returns applications that lack complete verification documents. Gather these essential materials before mailing your package:

• Forms from Booklet: Completed Form 656 and Form 433-A (OIC) or Form 433-B (OIC).
• Application Fees: Form 656 application fee ($205) and initial offer payment check, unless Low-Income Certified.
• Bank Records: Complete statements for all personal and business checking, savings, and investment accounts for the last 3 consecutive months.
• Income Verification: Pay stubs or profit/loss statements covering the last 3 consecutive months.
• Expense Proof: Rent/mortgage statements, utility bills, health insurance bills, and out-of-pocket medical receipts.

9. Common Mistakes to Avoid

Filing errors using Form 656-B can lead to immediate application returns and lost processing fees. Avoid these frequent mistakes:

• Filing While Non-Compliant: Submitting the application package while owing unfiled prior-year tax returns or missing current estimated tax deposits.
• Offering Below Calculated Minimums: Proposing a settlement amount lower than the Minimum Offer Amount calculated on Form 433-A (OIC) or 433-B (OIC).
• Submitting During Bankruptcy: Filing an OIC package while actively in bankruptcy proceedings.
• Missing 3-Month Statements: Attaching only 1 month of bank statements or pay stubs instead of the mandatory 3-month history.
• Breaching Post-Acceptance Terms: Failing to file tax returns on time or owing new tax debts during the 5 years *after* offer acceptance. Doing so defaults the settlement and reinstates full original tax liabilities plus penalties.

10. Penalties for Non-Filing or Errors

While utilizing Form 656-B is a voluntary tax settlement application, submitting false data carries severe consequences.

Key risks and consequences include:

• Application Return and Fee Loss: Incomplete applications are returned without evaluation. Your $205 fee and initial payments are non-refundable and will be applied to your outstanding tax debt.
• Resumption of IRS Collections: If your application is rejected or returned, the IRS will immediately resume bank levies, wage garnishments, and federal tax liens.
• Extended Collection Time Limit: Submitting an OIC package suspends the IRS 10-year collection statute of limitations while reviewed, plus 30 days.
• Perjury Prosecution: Falsifying financial details or concealing assets on Form 656-B forms is a federal crime under 18 U.S.C. 1001, punishable by fines and up to 5 years in prison.

11. Related Forms or Schedules

Form 656-B incorporates and connects several core IRS debt settlement and collection forms:

• Form 656: Offer in Compromise (the main legal settlement agreement form).
• Form 433-A (OIC): Collection Information Statement for Wage Earners and Self-Employed Individuals.
• Form 433-B (OIC): Collection Information Statement for Businesses.
• Form 656-L: Offer in Compromise (Doubt as to Liability).
• Form 9465: Installment Agreement Request.

12. Frequently Asked Questions

1. What is IRS Form 656-B?

IRS Form 656-B is the official Offer in Compromise Booklet. It contains complete instructions, eligibility worksheets, and the actual forms (Form 656, Form 433-A (OIC), and Form 433-B (OIC)) required to apply for a tax debt settlement.

2. What forms are included inside the Form 656-B booklet?

Form 656-B contains Form 656 (Offer in Compromise), Form 433-A (OIC) for individuals, Form 433-B (OIC) for businesses, application checklists, and Low-Income Certification worksheets.

3. What is the difference between Form 656-B and Form 656-L?

Form 656-B is the application booklet used to settle tax debt based on inability to pay (Doubt as to Collectibility) or economic hardship (Effective Tax Administration). Form 656-L is used when disputing whether the tax debt is legally owed (Doubt as to Liability).

4. Who qualifies for the Low-Income Certification fee waiver in Form 656-B?

Individual taxpayers whose gross household income is at or below 250% of the federal poverty guidelines qualify for Low-Income Certification, waiving the $205 application fee and initial offer payments.

5. What is Reasonable Collection Potential (RCP)?

Reasonable Collection Potential is the IRS formula used to determine your minimum acceptable settlement offer. It combines your net equity in personal/business assets with your future disposable monthly income.

6. How long does the IRS take to review an application from Form 656-B?

The IRS generally takes 6 to 12 months to evaluate an Offer in Compromise application. By law, if the IRS does not render a determination within 24 months of receipt, the offer is deemed automatically accepted.

13. Conclusion

IRS Form 656-B is the ultimate roadmap for individual and business taxpayers seeking relief from overwhelming federal tax debts. By combining detailed instructions, pre-qualification steps, financial worksheets, and core filing forms into one booklet, it provides everything needed to structure a successful settlement proposal.

To achieve tax resolution, follow the pre-qualification steps in Form 656-B carefully, calculate your Minimum Offer Amount accurately using the included 433-OIC worksheets, attach 3 months of financial verification statements, and maintain full tax compliance after submission.