How to Apply for an Offer in Compromise With the IRS: Step by Step

This is the complete federal application sequence for an IRS Offer in Compromise — the same steps the IRS’s Form 656-B booklet lays out, organised as one start-to-finish route with the cluster’s deep guides attached to each step. It deliberately does not re-teach what its child pages own: eligibility logic lives on the qualification page, the tick-box gates on the checklist, and form-by-form detail on the 433-A and 433-B/656 walkthroughs.

General tax information, not tax or legal advice. Federal IRS programme only.

The sequence at a glance

1. Confirm eligibility → 2. Run your numbers (RCP) → 3. Complete Form 433-A or 433-B → 4. Complete Form 656 → 5. Assemble documents → 6. Fee + first payment → 7. Mail or file → 8. Stay compliant during review

Step 1 — Confirm you are eligible to be processed

All required returns filed; no open bankruptcy; current-year withholding/estimates on track; (businesses) current federal tax deposits. Run the checklist — an offer failing these gates is returned unexamined.

Step 2 — Run your numbers before writing anything

Compute your reasonable collection potential (asset equity + future income) with the calculator and sanity-check it against the worksheet guide. Your offer amount comes out of this step; choosing the payment structure (lump sum vs periodic) sets the multiplier.

Step 3 — Complete the financial statement

• Individuals & sole proprietors → Form 433-A (OIC) — personal/household info, assets, self-employment, monthly income & expenses, and the minimum-offer computation (walkthrough).
• Corporations, partnerships, LLCs (as entities) → Form 433-B (OIC) — business assets, income, expenses (walkthrough). Use the current revisions from IRS.gov; the booklet (Form 656-B) is the official companion.

Step 4 — Complete Form 656 (the offer itself)

Identifies the tax periods, the legal ground (collectibility / liability / effective tax administration), the offer amount, and the payment terms you selected in Step 2 — the 433-B/656 walkthrough covers its sections. Sign it: an unsigned offer is non-processable.

Step 5 — Assemble the documentation packet

Bank statements (recent months), pay/earnings statements, loan statements, asset valuations, expense proof — the documents that prove the figures on your 433 form. The mistakes page lists what examiners ask for when packets are thin; include it the first time.

Step 6 — Fee and first payment (separate instruments)

• $205 application fee — its own check/money order (never combined with the payment).
• Initial payment: 20% of the offer (lump-sum structure) or the first monthly instalment (periodic) — a second, separate instrument.
• Low-income certified? Both are waived — run the test on the fee page before writing any checks.

Step 7 — Submit

Mail the packet to the IRS processing site for your state (the addresses are in Form 656-B — Memphis or Brookhaven depending on residence/business) or submit through your IRS Individual Online Account where available. Keep a complete copy and proof of mailing. Designate in writing if you want payments applied to specific periods (undesignated payments are applied at the IRS’s discretion).

Step 8 — Stay compliant during review (6–24 months)

File and pay all current taxes on time; make every periodic payment; answer examiner document requests by their deadlines. What the wait looks like, and every clock inside it: the timeline page. Outcomes and next moves: accepted · rejected.

Frequently asked questions

How do I submit my application? As one packet — Form 656, the applicable 433 form, supporting documents, fee and initial payment (separate instruments) — mailed to the processing site in Form 656-B for your state, or filed via your IRS online account where supported. (NYC’s programme page uses this same section heading for its city process; the federal route is as described.)

What should I expect after submitting an Offer in Compromise (OIC or offer)? An acknowledgment, a processability screen, assignment to an offer examiner, document requests, and a decision within roughly 6–24 months (IRS FAQ). The timeline details each stage and your duties inside it.

How much does it cost to apply for an Offer in Compromise? $205 fee + the initial payment for your structure (20% lump-sum down payment or first periodic instalment), unless low-income certified (TaxWave FAQ; IRS pages) — full breakdown on the fee page.

How do I know if an offer is right for me? Before Step 1, run the qualification logic and the calculator — the IRS FAQ’s own framing is that an offer fits when you cannot pay in full and the amount offered reflects your collection potential.

General tax information, not tax or legal advice. Sources: IRS Offer in Compromise page (“How to apply for an OIC”); Form 656-B booklet steps; IRS OIC FAQs; TaxWave (questions). Reviewed 2026-10-22.