Form 656: How an IRS Offer in Compromise Works, Fees and Payment Options

An offer is a serious step with strict conditions, and many are returned before they're even considered. Here's how it works, from the IRS Form 656 Booklet (with the April 2026 collection forms) and the IRS Offer in Compromise page.

Before you can apply

1. File every tax return you're legally required to file.
2. Have received a bill for at least one tax debt included in the offer.
3. Make all required estimated tax payments for the current year.
4. If you're an employer, make federal tax deposits for the current quarter and the two before it.

If the IRS finds unfiled returns, it keeps your initial payment against the debt and returns only the offer and fee, and you can't appeal. You also can't apply while in an open bankruptcy proceeding. The IRS's Pre-Qualifier tool and your Individual Online Account can check eligibility first.

The three grounds for an offer

Ground	When it fits	Form
Doubt as to Collectibility	You can't pay the full debt from assets and income	Form 656
Effective Tax Administration	You could pay, but it would cause economic hardship or be unfair	Form 656
Doubt as to Liability	You doubt you owe some or all of the tax	Form 656-L

Don't submit a liability offer and a collectibility or ETA offer at the same time.

Paying for the offer

Option	With the application	After acceptance
Lump sum	$205 fee + 20% of the offer amount	Balance in 5 or fewer payments within 5 or fewer months
Periodic payment	$205 fee + first monthly payment	Keep paying monthly while it's reviewed; total paid within 6 to 24 months

Under the periodic option, missing a payment before the decision can get your offer returned with no appeal. Payments generally aren't refunded, and you can't pay the offer with an expected tax refund, funds already paid or seized funds.

The low-income waiver

Individuals and sole proprietors whose adjusted gross income, or household gross monthly income x 12, is at or below the IRS table for their family size and location don't pay the fee or any payments while the offer is reviewed. The 2026 booklet's limits, as of October 2026, for the 48 contiguous states, D.C. and US territories:

Family size	Income at or below
1	$39,900.00
2	$54,100.00
3	$68,300.00
4	$82,500.00
Each additional person	Add $14,200.00

Alaska and Hawaii have higher limits in the same table. Businesses other than sole proprietors don't qualify.

How the IRS works out a minimum offer

The minimum is broadly your equity in assets plus future income. On Form 433-A (OIC), monthly income left after allowable expenses is multiplied by 12 if you'll pay in 5 months or less, or by 24 if you'll pay over 6 to 24 months. So the lump sum route usually means a lower offer. Some asset values are reduced too; retirement accounts, for example, are counted at current market value multiplied by 0.8, minus any loan.

After you apply

• Reply to any IRS request on time, or the offer is returned without appeal rights.
• The IRS may keep refunds for tax periods ending before acceptance, and they don't count toward the offer.
• Interest and penalties keep accruing while it's pending.
• If the IRS doesn't accept or reject within two years, the offer is automatically approved (appeal time excluded).
• Federal tax liens aren't released until the offer is paid in full.
• If accepted, you must file and pay on time for the next five years, or the IRS can default the offer and reinstate the original debt.

If an offer doesn't fit, a payment plan may: see Form 9465 and our guide to Form 433-F, the collection statement for installment agreements.

Mistakes that get offers returned

• Missing returns: the most common reason, and there's no appeal.
• Skipping estimated tax payments for the current year.
• Leaving out required documents or the Form 433-A (OIC) or 433-B (OIC).
• Sending both a liability offer and a collectibility offer.
• Missing a monthly payment under the periodic option.

Some of your offer information also goes into a public inspection file, which is worth knowing if privacy matters to you. And if you're already working with an IRS employee on collection, tell them you've sent an offer.

Offer in compromise vs a payment plan

	Offer in compromise	Payment plan
What you pay	Less than the full debt, if accepted	The full debt plus interest and penalties
Upfront cost	$205 fee plus first payment, unless low income	Set by the plan type
Who it suits	People who can't pay in full from assets and income	People who can pay over time
Commitment	Five years of on-time filing and payment	Payments until the balance is cleared

The verdict

Run the Pre-Qualifier before you spend $205. An offer works when the IRS math says you can't pay; it rarely works as a discount for people who could. If you go ahead, choose the lump sum option if you can raise 20%, since it uses the 12-month income multiplier, and treat the five years after acceptance as part of the deal. Miss a return in that window and the original debt, with interest and penalties, can come back.

Frequently asked questions

How much does it cost to file Form 656?

A $205 application fee plus an initial payment, unless you meet the IRS Low-Income Certification guidelines.

How long does the IRS take to decide an Offer in Compromise?

If the IRS doesn't accept or reject it within two years of receiving it (excluding appeal time), it's automatically approved.

What is the 20% payment for Form 656?

Under the lump sum option, 20% of the offer amount goes with the application and the rest is paid in 5 or fewer payments within 5 months of acceptance.

What happens after an Offer in Compromise is accepted?

You must file and pay all taxes on time for five years, or the IRS can default the offer and reinstate the original debt.