Last Updated: April 22, 2025
If you’re struggling with tax debt, the IRS Offer in Compromise (OIC) program might be your path to a fresh start. This program allows qualified taxpayers to settle their tax debt for less than the full amount owed—sometimes significantly less. The application process centers around Form 656, which the IRS has recently updated with important changes for April 2025.
What is an Offer in Compromise?
Before diving into the changes, let’s clarify what an Offer in Compromise actually is. An OIC is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed. This option is typically available when:
- You cannot pay your full tax liability
- Paying the full amount would create financial hardship
- There’s doubt as to the liability (you don’t actually owe the amount assessed)
While OICs can provide tremendous relief, they’re not automatically granted. The IRS carefully evaluates your ability to pay, income, expenses, and asset equity before making a decision.
Key Changes to Form 656 (April 2025 Revision)
The IRS regularly updates Form 656 to improve clarity and reflect current processes. The April 2025 revision includes several significant changes that both taxpayers and tax professionals should understand:
- Enhanced Digital Tools for Eligibility Verification
What’s New: The form now explicitly recommends using either the IRS Pre-Qualifier tool or the Individual Online Account (IOLA) eligibility check before submitting an application.
Why It Matters: While these tools provide basic guidance, taxpayers should not rely solely on IRS pre-screening tools. Tax resolution specialists experienced in OIC submissions, including Ace Plus Tax Resolution, can often identify opportunities that automated tools miss. These professionals understand the nuances of financial analysis that the IRS uses and can structure your offer for the best possible outcome. An experienced tax professional can not only help determine eligibility but can strategically prepare and negotiate your offer for maximum savings and highest likelihood of acceptance—something no automated tool can provide.
- Clearer Instructions for Married Taxpayers
What’s New: The revised form provides detailed guidance for spouses with both joint and separate tax liabilities. If either spouse has individual tax debts, separate Forms 656 must be submitted.
Why It Matters: This clarification helps ensure proper processing of offers involving multiple types of liability, potentially reducing processing delays and rejection risk.
- Modernized Payment Options
What’s New: Applicants can now explicitly make their application fee and initial payment via the Electronic Federal Tax Payment System (EFTPS) or the Individual Online Account (IOLA).
Why It Matters: Electronic payment options streamline the process and provide better payment tracking. The form specifies that electronic payments must be made on the same date the offer is submitted—a critical timing requirement to avoid rejection.
- Improved Form Organization
What’s New: The form now has clearly separated sections for different taxpayer types:
- Section 1: For individuals (including sole proprietors)
- Section 2: For businesses (corporations, partnerships, LLCs, LLPs)
Why It Matters: This structural improvement makes the form easier to navigate and reduces the risk of errors that could delay processing.
- Simplified Address Updates
What’s New: There’s now a direct question asking if your address has changed since your last filed tax return, with a clear option to update IRS records.
Why It Matters: Ensuring the IRS has your current address is crucial for receiving notices and preventing missed deadlines that could terminate your offer.
- More Detailed Payment Designation Instructions
What’s New: The form provides enhanced information about how payments can be designated to specific tax periods or debts, with clear limitations on what types of payments can be designated.
Why It Matters: This clarity helps taxpayers direct payments to specific tax debts, potentially maximizing the benefit of their payments.
- Explicit Exclusions
What’s New: The form more prominently highlights certain liabilities that cannot be compromised, such as those resulting from IRS-assessed restitution or liabilities under IRC § 965(i).
Why It Matters: Understanding what can and cannot be included in your offer is essential to avoid wasting the application fee on debts that aren’t eligible.
Is an Offer in Compromise Right for You?
While the Form 656 updates make the process clearer, an OIC isn’t the right solution for everyone. Before applying, consider:
- Your financial situation: The IRS will thoroughly analyze your ability to pay, including income, expenses, asset equity, and future earning potential.
- Alternative options: Payment plans, Currently Not Collectible status, or bankruptcy might be better options depending on your circumstances.
- The $205 application fee: Unless you qualify for a low-income exemption, this non-refundable fee applies even if your offer is rejected.
- The 20% down payment requirement: For lump-sum offers, you must include 20% of the offer amount with your application.
The Value of Professional Representation
Navigating the OIC process can be complex, and the IRS rejects many offers. Working with a tax professional experienced in IRS representation—particularly one familiar with the latest Form 656 changes—can significantly increase your chances of success.
A qualified tax professional can:
- Help determine if an OIC is your best option
- Accurately complete Form 656 and required financial statements
- Calculate an appropriate offer amount the IRS is likely to accept
- Communicate with the IRS on your behalf during the evaluation process
- Suggest alternatives if your OIC is not accepted
Next Steps for Taxpayers
If you’re considering an Offer in Compromise:
- Gather detailed financial information, including income, expenses, asset values, and liabilities
- Consider consulting with a tax professional experienced in IRS representation
- Download the latest Form 656 and instructions from the IRS website
- Follow the new guidelines carefully, especially regarding payment methods and timing
Conclusion
The April 2025 revisions to Form 656 reflect the IRS’s ongoing efforts to clarify instructions, modernize payment processes, and reduce errors in the Offer in Compromise application process. These changes should make the application process somewhat less daunting for taxpayers seeking relief from overwhelming tax debt.
Remember that while the form updates are helpful, the underlying OIC evaluation criteria remain rigorous. The IRS will still thoroughly analyze your ability to pay before approving any offer. Professional guidance can be invaluable in navigating this complex process and maximizing your chances of securing tax debt relief.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific situation.
Need help with IRS representation or navigating the Offer in Compromise process? Our team of experienced tax professionals stays current with the latest IRS changes and can help determine if an OIC is right for your situation. Contact Ace Plus Tax Resolution today for a consultation.
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