Preparing an Offer in Compromise: Documentation Checklist

Why documentation matters

The IRS evaluates an Offer in Compromise (OIC) primarily on your ability to pay. Accurate, organized documentation tells the IRS whether your Reasonable Collection Potential (RCP) — the amount the IRS expects it can collect from you over time — justifies accepting less than the full tax debt. In my practice working with individuals and small business owners, well-prepared packets move faster, reduce follow-up requests, and increase acceptance odds (IRS Offer in Compromise page).

Below is a practical, prioritized checklist you can use to assemble a complete OIC submission. Each item includes what the IRS expects, common pitfalls I see with clients, and how to document items so they withstand IRS review.

Core forms you must include

1. Form 656, Offer in Compromise — the official application. Complete all applicable sections and sign the taxpayer declaration. If filing Jointly, both spouses must sign. Include the correct offer price and proposed payment terms.

2. Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses — the Offer in Compromise version of the Collection Information Statement. These forms document income, assets, monthly expenses, and liabilities. Use the (OIC) variants — they contain fields the IRS uses to compute RCP.

3. If you propose a lump-sum offer or periodic offer, include the initial payment required by the IRS with Form 656. Note: payment options and amounts vary by offer type; review the payment rules on the IRS OIC page and Form 656 instructions (IRS, Offer in Compromise).

Common pitfall: Incomplete or unsigned forms are the fastest way to have your offer returned without consideration.

Income documentation (verify ability to pay)

• Pay stubs covering at least the last 30 days; if self-employed, provide profit-and-loss statements and bank deposits for the most recent 3–12 months.
• Federal and state tax returns for the last two years (or the years requested by the IRS).
• Proof of other income: Social Security award letters, unemployment benefits, pension statements, child support, or public assistance documents.

Why it matters: The IRS verifies current and recurring income streams when calculating your monthly income in Form 433-A (OIC).

Tip from practice: If you have irregular income (commissions, seasonal work), provide a 12-month summary and notes explaining seasonality. That prevents the IRS from assuming higher recurring monthly income than is realistic.

Asset documentation (show what is and isn’t collectible)

• Bank statements for the prior 3–6 months for all accounts (checking, savings, CDs). Include account numbers and routing as necessary.
• Retirement account statements (IRAs, 401(k)s) showing current balance and any distribution restrictions.
• Investment account statements and brokerage statements.
• Real estate documentation: mortgage statements, recent property tax bills, and a copy of any recent appraisal or broker price opinion (BPO). If property is listed for sale, include listing agreement and MLS printout.
• Vehicle titles, loan statements, and mileage evidence (if using IRS vehicle valuation tables). If you claim vehicles as essential, provide proof how they are used for employment/medical needs.
• Business asset lists and balance sheets (for business offers).

Practice note: The IRS will count equity in assets toward RCP unless an asset is exempt or selling it would cause undue hardship. Document liens, pending sales, or divorce settlements that affect asset availability.

Monthly expense documentation (justify allowable expenses)

• Mortgage or rent statements, property tax bills, homeowners’ insurance, and utility bills.
• Childcare, child support, and educational expenses with invoices or contracts.
• Medical and dental bills, detailed statements from providers, and proof of insurance. Include payment plans and outstanding balances.
• Transportation: auto loans, insurance, registration, and documented monthly fuel/maintenance costs.
• Court-ordered payments and other legally required obligations.

What the IRS expects: Reasonable, ordinary, necessary living expenses. Avoid listing inflated or discretionary expenses; the IRS will request documentation and can reject unsupported items.

Hardship and special circumstance evidence

Provide documentation for any factor that reduces your ability to pay or makes collection unreasonable:

• Medical hardship: detailed medical bills, itemized statements, disability determinations, or a doctor’s letter describing limitations.
• Unemployment or reduced hours: separation notices, unemployment benefit statements, or employer letters confirming reduced pay.
• Natural disaster or catastrophic loss: insurance claims, FEMA documentation, repair estimates.

From my experience: Strong hardship documentation—especially when tied to verifiable records—can shift the IRS evaluation in your favor. Vague claims without papers often lead to denials or extended requests for information.

Proof of ownership and legal documents

• Copies of divorce decrees, separation agreements, child custody agreements showing financial obligations.
• Bankruptcy filings and discharge paperwork, if applicable. Note: a pending bankruptcy may complicate or suspend IRS collection activity; discuss with counsel.
• Power of attorney or Form 2848 if a representative files on your behalf.

Payment options and proof

• If submitting a lump-sum offer: include the required initial payment with your Form 656 (see Form 656 instructions). The IRS typically requires a certain percentage as an initial payment depending on offer type.
• For periodic payments: include the first periodic payment and a proposed schedule. Provide bank authorization for direct debit when required.

Practical tip: Maintain a record (copy of the check or online payment confirmation) showing the IRS received your payment. Payment handling mistakes are common reasons for processing delays.

Organization and presentation

• Create a cover letter that lists included documents and a brief statement of why an OIC is requested. Keep the letter concise and factual.
• Use a checklist and tabbed attachments corresponding to each Form 433 line item (income, assets, monthly expenses). This saves time during an IRS review and reduces follow-up letters.
• Make copies of the entire packet and keep originals for your records. Send the packet via certified mail or other trackable delivery if mailing.

In practice, a one- to two-inch binder with labeled tabs and copies indexed to Form 433 slashes processing time and reduces requests for missing information.

Common mistakes and how to avoid them

• Missing signatures or incomplete fields on Form 656 or 433-A (OIC): double-check every signature prior to submission.
• Forgetting to provide proof for claimed expenses: always attach bills or statements supporting each monthly expense line.
• Underreporting or omitting assets: full disclosure is critical. The IRS can assess penalties for fraud and will reject offers that are not truthful.
• Submitting an offer without exploring alternatives: sometimes an Installment Agreement or Currently Not Collectible status is a better immediate option. See our guide on Choosing Between an Installment Agreement and an Offer in Compromise.

After submission: timeline and next steps

• Typical processing time ranges from 6 to 12 months but varies by case complexity and IRS workload. Keep records of any IRS requests and respond promptly (IRS OIC page).
• If the IRS requests additional documentation, provide the requested items within the timeframe—delays can result in return or denial.
• If denied, you have administrative appeal rights and other options. Review our articles on Options After a Denied Offer in Compromise and Reapplying After a Denied Offer in Compromise for next steps.

Real-world examples (anonymized)

• A single parent with significant unreimbursed medical expenses and limited assets submitted a fully documented OIC with medical bills, 12 months of bank statements, and proof of childcare expenses. The IRS accepted a lump-sum settlement at about 25% of the balance after verifying RCP.

• A self-employed taxpayer who failed to include accurate business bank statements and missed signing Form 656 had the offer returned. After re-filing with complete P&L, bank records, and signed forms, the offer was reconsidered.

These cases underline two practical lessons: document everything and don’t file until the packet is complete.

Additional resources

• IRS Offer in Compromise main page: https://www.irs.gov/payments/offer-in-compromise (official guidance and forms)
• Use our walkthrough on Preparing the Financial Statement for an Offer in Compromise for detailed help completing Form 433-A (OIC).

Professional disclaimer

This article explains common documentation requirements for Offers in Compromise and is for educational purposes only. It does not replace personalized tax advice. For case-specific guidance, consult a qualified tax professional (CPA, enrolled agent, or tax attorney).

Sources and citations:

• IRS, Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise (accessed 2025)
• Form 656 and Form 433-A (OIC) instructions, IRS.gov (accessed 2025)

If you want, I can convert this checklist into a printable packet template (fillable checklist and tab index) you can use to assemble your submission.