Crafting a Strong Offer in Compromise: Documentation and Valuation Tips

Why documentation and valuation matter

An Offer in Compromise succeeds or fails on its paperwork. The IRS uses the information you submit to calculate your Reasonable Collection Potential (RCP) — a measure of what the government believes it can collect from your assets and future income. A well-documented OIC shows the IRS that your offer is realistic and that collecting the full debt would be unfair or impractical. For authoritative guidance see the IRS Offer in Compromise page and Form 656 instructions (IRS).

In my 15 years as a CPA working in tax resolution, I’ve seen two recurring patterns: applicants who win are meticulous with third‑party valuation evidence and those who lose submit inconsistent or unsupported statements of income and expenses. This guide gives a practical checklist and valuation tactics you can apply before filing.

Quick checklist before you file

• Confirm eligibility: up to date on tax returns and current filings; not in an active installment agreement default. See Offer in Compromise (OIC) overview.
• Gather identity documents: social security numbers, government IDs.
• Assemble recent pay stubs, W‑2s, 1099s, and bank statements (3–6 months).
• Collect proof of monthly expenses: rent/mortgage, utilities, insurance, medical bills, child support.
• Valuation evidence for assets: appraisals, signed dealer quotes, NADA/Kelley Blue Book printouts for vehicles, comps for real estate.
• Business financials (if applicable): profit & loss, balance sheet, recent tax returns, and a qualified business valuation if value is material.

I also recommend pre‑running a sanity calculation of your likely RCP using the documentation above. This saves time and application fees if the IRS’s likely minimum is above what you can offer.

What the IRS looks at (and how to document it)

1. Assets and equity

• The IRS counts equity, not gross asset value. Document the market value (comps, appraisal) and any encumbrances (loans, liens). For real estate use a recent comparative market analysis or licensed appraisal. For vehicles use Kelley Blue Book or NADA values and provide mileage/photos and loan payoff statements.
• Retirement accounts may be counted differently; many plans have surrender/penalty values rather than full account balance. Provide plan statements and withdrawal penalty schedules.

1. Income and disposable monthly income

• Provide pay stubs, 1099s, W‑2s, and business bank statements. The IRS will subtract allowable living expenses (using IRS Collection Financial Standards and actual verified expenses) to determine monthly disposable income. Link source: IRS Collection Financial Standards and Form 433‑A/B instructions.

1. Reasonable Collection Potential (RCP)

• The IRS uses RCP — a combination of net equity in assets plus an assessment of future income (monthly disposable income multiplied by the number of months the IRS believes it can collect). You should be prepared to show why your income or expense situation justifies a lower multiplier (medical debt, short‑term disability, seasonal income variability).

1. Compliance and credibility

• Filing history, payment compliance, and truthful, consistent documentation matter. Any omission (e.g., undisclosed bank account) can lead to rejection and potential penalties. Keep a single, clearly organized submission package with numbered attachments.

Valuation tips that strengthen your case

• Use current, independent evidence: third‑party appraisals, dated market comps (within 6 months), or dealer quotes. The IRS gives more weight to outside valuations than to owner estimates.
• Calculate equity conservatively: fair market value minus liens = equity. For example, a car with FMV $8,000 and a $6,500 loan has $1,500 of equity — don’t argue inflated values.
• For business assets and goodwill, obtain a concise business valuation (income or market approach) from a qualified professional. Provide recent tax returns and bank statements to corroborate cash flow.
• Document non‑liquid assets carefully: jewelry, collectibles, and second homes often require itemized appraisals. If an asset is truly non‑exempt and essential to earning income (like tools of a trade), explain that and provide supporting documentation.

Documentation packet — what to include (recommended order)

1. Form 656 (signed) and Form 433‑A (OIC) or 433‑B (OIC) as applicable. See Form 656 — Offer in Compromise.
2. Cover letter summarizing your offer, the basis for the amount, and a table of contents for attachments.
3. Proof of identity and social security numbers.
4. Recent tax returns and transcripts for the tax years listed on the OIC.
5. Proof of income (pay stubs, 1099s, bank statements).
6. Expense documentation (mortgage statements, lease, medical bills, child support).
7. Asset valuations: appraisals, comp sheets, loan payoff statements.
8. Business financials and valuation (if applicable).
9. Medical records or evidence of special circumstances (if claiming hardship).
10. Signed statements explaining inconsistencies or special circumstances (loss of job, disability).

Number pages and cross‑reference exhibits in your cover letter. That reduces the IRS’s need to request additional information and speeds review.

Common mistakes to avoid

• Overvaluing assets or using subjective “replacement” figures without proof.
• Omitting bank accounts, side gigs, or rental income. The IRS can and will verify through information matching.
• Relying solely on your own statement for real‑estate values instead of a third‑party comp or appraisal.
• Ignoring allowable living standards: some taxpayers use inflated expenses outside IRS Collection Financial Standards without documentary support.

Handling special situations

• Doubt as to Liability and Effective Tax Administration: not every OIC relies on doubt as to collectibility. If there is a genuine question about whether the tax is legally owed, or accepting full payment would be unfair due to exceptional circumstances, the IRS may consider other bases for acceptance. See related guidance on How to Qualify for an Offer in Compromise Based on Doubt as to Liability.
• Bankruptcy: bankruptcy can affect the timing and treatment of an OIC. You can apply while in bankruptcy, but the procedures and leverage points differ — consult a tax attorney or CPA with bankruptcy experience.

Timeline, appeals, and follow‑ups

• Typical IRS processing can take several months; complex cases commonly run 6–12 months. Use the Offer in Compromise Process for an overview of common milestones.
• If rejected, you generally receive a notice (e.g., Letter 2604C) with reasons and next steps. You can appeal or request reconsideration (Letter 3489 for reconsideration requests is often relevant). Keep copies of everything and respond promptly to information requests (e.g., Letter 3228C).

Practical example (simplified)

Assume: Asset equity = $4,000. Monthly disposable income after allowable expenses = $150. If the IRS applies a 12‑month collection expectation, future income component would be $1,800 and RCP would be $5,800. Your offer should be at or above this RCP for a likely acceptance under doubt as to collectibility. This is an illustrative example — the IRS’s actual multiplier and approach vary by case. Always run your own calculation with current documentation.

Professional tips

• Be transparent: list everything in one organized packet. In my practice, a single well‑organized binder reduces processing time and avoids requests for missing items.
• Use narrow, well‑documented valuations. A professional appraisal for real estate or an independent market report for business goodwill pays for itself in credibility.
• Consider timing: if you expect a large life change (e.g., job loss, major medical expense), document it and consider timing the offer when your ability to pay is clearer.
• If in doubt, consult a specialist: a CPA or enrolled agent with OIC experience or a tax attorney can help structure the offer and present valuation evidence persuasively.

Sources and further reading

• IRS — Offer in Compromise, forms and instructions: https://www.irs.gov/individuals/offer-in-compromise
• IRS Form 656 and Form 433‑A (OIC) / 433‑B (OIC) instructions (see IRS site for latest PDFs).
• Taxpayer Advocate Service — Offer in Compromise guide and taxpayer rights: https://www.taxpayeradvocate.irs.gov/
• FinHelp: Form 656 — Offer in Compromise, Offer in Compromise (OIC) overview, Offer in Compromise Process.

Professional disclaimer: This article is educational and reflects my experience as a CPA; it is not personalized tax advice. Rules and agency practices change; consult the IRS or a qualified tax professional before filing an Offer in Compromise.

Ready to prepare your packet? Start by ordering the valuation evidence (appraisals, vehicle guides) and pulling three months of bank statements. If you want, I can help you draft the cover letter and assemble a prioritized checklist for submission.