Regardless of the offer option, continue filing required returns, paying current taxes, making estimated payments, and making required federal tax deposits. Falling behind can cause the IRS to return the offer.
Periodic-payment offer
Include the first proposed installment with Form 656 and continue making the proposed monthly installments while the IRS considers the offer. The payments are generally nonrefundable and are applied to the tax liability. Missing a required periodic payment can cause the IRS to return the offer without appeal rights.
Lump-sum offer
Include a nonrefundable payment equal to 20% of the proposed offer amount with the application. The remaining accepted offer amount is due in five or fewer payments within five or fewer months after acceptance. The ordinary lump-sum route does not require proposed monthly offer installments during the review period.
Low-Income Certification
An individual or sole proprietor who qualifies under the current Low-Income Certification does not send the $205 application fee, the initial offer payment, or periodic offer payments while the IRS reviews the offer. Check the current Section 1 chart in Form 656 because the amount depends on family size and location. Do not send money voluntarily if the current form says the certification applies; voluntary payments generally will not be returned.
Existing IRS installment agreement
The IRS states that a taxpayer does not have to make payments on an existing installment agreement while it evaluates a processable offer in compromise. This does not erase the installment balance or excuse current tax obligations. Follow any later letter from the assigned IRS office.
Interest, penalties, refunds, and collection
Penalties and interest continue to accrue while the offer is considered. Offer payments are applied to the tax debt even if the offer is rejected or returned. The IRS generally suspends other collection activity while a processable offer is pending, but it may file a federal tax lien notice, and an earlier levy is not automatically released.
The IRS may keep certain refunds through the date it accepts an offer, as described in the current Form 656 terms. Do not reduce or skip a required payment because you expect a refund unless the IRS gives written instructions.
Recommended action
- Confirm whether the application is lump sum, periodic payment, or covered by Low-Income Certification.
- Use the current Form 656-B and the latest IRS letter for the exact payment instructions.
- Save electronic confirmations or copies of checks and mailing proof.
- Keep all current filing, estimated-tax, and deposit obligations up to date.
- Contact the assigned IRS employee promptly if a required payment cannot be made.