Assembling the Financial Package for a Competitive Offer in Compromise

Why the financial package matters

When you submit an Offer in Compromise (OIC), the IRS is not just looking for numbers — it’s looking for a credible, verifiable story about your ability to pay. The financial package is the primary evidence the IRS uses to calculate Reasonable Collection Potential (RCP), determine whether an offer is reasonable, and decide whether collection actions should continue. A clean, well-organized package reduces questions, speeds review, and increases the chance the IRS will see your offer as fair.

In my practice helping taxpayers prepare OICs, I’ve seen two clear outcomes: offers accepted quickly when documents are complete and consistent, and costly delays or denials when records are missing or contradictory.

Essential documents to include

Below is a practical checklist. Bring originals when available and include clear copies in the submission packet.

• Completed Form 656, Offer in Compromise (see IRS instructions) (IRS: https://www.irs.gov/payments/offer-in-compromise).
• The appropriate financial statement form: Form 433-A(OIC) for individuals or Form 433-B(OIC) for businesses. Use the form that matches your taxpayer status and complete every applicable line.
• Proof of income: recent pay stubs (last 2–3 months), year-to-date employer statements, profit-and-loss statements for self-employed taxpayers, and the last two years’ federal tax returns.
• Bank statements: checking, savings and investment account statements for the past 3–6 months.
• Asset documentation: titles, valuations, vehicle registration, recent mortgage statements, appraisal reports if available, retirement account statements and brokerage statements.
• Expense verification: lease or mortgage agreements, utility bills, insurance premiums, medical bills, child support or alimony orders, and court-ordered obligations.
• Third-party verification: letters from employers (confirming wages or layoffs), trustee statements, or a bankruptcy discharge if applicable.
• Application fee and payment (see IRS rules and low-income exceptions): include the fee if required and the initial payment for your chosen offer type as instructed on Form 656.

I recommend attaching a one-page summary checklist as a cover sheet listing enclosed documents. That helps an examiner see completeness at a glance.

How the IRS evaluates the package (simple terms)

The IRS computes your Reasonable Collection Potential (RCP): essentially, what the IRS could expect to collect now or in the foreseeable future from your assets and future income. The major inputs are:

• Equity in assets (what selling an asset would realistically yield after liens, penalties and selling costs).
• Disposable monthly income (income after allowable living expenses).
• Tax refunds or other receivables that can be intercepted.

The IRS compares RCP to your offer amount and your history of cooperation (filing and paying current taxes). If RCP is less than your offer, your offer is more likely to be accepted. See the IRS RCP explanation at the Offer in Compromise page (IRS: https://www.irs.gov/payments/offer-in-compromise).

How to make your package competitive: practical strategies

1. Be completely honest and consistent. Omissions or contradictions are the fastest route to denial. The IRS has access to reported income and asset records and will verify what you submit.

2. Use documented, contemporary proofs. Old or hand-written figures without backup are weaker than bank statements, pay stubs, or vendor invoices.

3. Explain irregular income. For self-employed taxpayers or seasonal workers, attach a short narrative and profit/loss statements that show income variability. I often prepare a one-page narrative to explain gaps, layoffs, medical events, or disasters that affected income.

4. Keep allowable living expense claims reasonable. The IRS publishes national and local standards for some expenses (e.g., food, clothing, housing) and disallows inflated claims. Where you claim an unusual but necessary expense (e.g., specialized medical costs), provide receipts and doctor statements.

5. Show inability to borrow or liquidate assets. If family or friends cannot or will not provide funds, include a signed statement. If an asset can’t be sold without significant loss (business goodwill, for instance), provide a valuation or an accountant’s memo explaining the constraints.

6. Organize clearly. Use tabbed sections, a table of contents, and a brief cover letter that states the offer amount, type of offer (lump-sum vs. periodic), and the forms enclosed.

Common documentation mistakes and how to avoid them

• Missing tax returns. Always include copies of the most recent filed returns — the IRS will not process an OIC unless returns are current.
• Unreconciled bank statements. If withdrawals or deposits are questionable, add a narrative or cancelled checks. Unexplained transfers trigger follow-up.
• Unsupported asset valuations. If you list a private business or unique asset, provide an appraisal or accountant valuation rather than a subjective number.
• Overstating expenses. Keep to IRS allowable standards; provide receipts where expenses exceed normative levels.

Organizing the packet (recommended format)

1. Cover letter: 1 page summarizing the offer, amount, and type (lump-sum or periodic). Mention that you are including Form 656 and Form 433-A(OIC) or 433-B(OIC).
2. Table of contents with page numbers.
3. Forms first: Form 656, the proper Form 433 series, signature pages.
4. Income proofs and tax returns.
5. Bank and investment account statements.
6. Asset documents and valuations.
7. Expense proofs (leases, medical bills, child support, insurance).
8. Supporting narratives, employer letters and third-party verification.
9. Copies of any prior correspondence with the IRS on this liability.

A scanned PDF organized this way works well for both mail and secure e-filing through a tax professional.

Payment options and fees (brief)

The IRS accepts offers in two basic payment structures: lump-sum and periodic payments. Each has related initial payment requirements and ongoing conditions while the offer is being evaluated. The OIC application fee applies in many cases (currently $205 for most applicants; low-income applicants may qualify for an exemption). Confirm the current fee and payment instructions on the IRS Offer in Compromise page before submitting (IRS: https://www.irs.gov/payments/offer-in-compromise).

Timeline, follow-up and what to expect

Processing times vary based on complexity and IRS workload; simple, complete packages can be reviewed in months, while complex cases often take six to twelve months. The IRS may request additional documentation — respond promptly and keep copies of all submissions. If your income or assets change while the offer is pending, notify the IRS immediately; failing to report material changes can lead to later reopening or denial.

If the IRS denies the offer

A denial will include reasons. You have options: file an appeal (follow the instructions in the denial), rework your package addressing the cause of denial, or consider alternatives like installment agreements or penalty abatement where appropriate. See related guides on appeals and alternatives for next steps. Useful internal reading: “Preparing an Offer in Compromise: Documentation Checklist” (finhelp.io) and “How Offer in Compromise Amounts Are Calculated: A Simple Walkthrough” (finhelp.io).

• Preparing an Offer in Compromise: Documentation Checklist: https://finhelp.io/glossary/preparing-an-offer-in-compromise-documentation-checklist/
• How Offer in Compromise Amounts Are Calculated: A Simple Walkthrough: https://finhelp.io/glossary/how-offer-in-compromise-amounts-are-calculated-a-simple-walkthrough/

Additional tips from practice

• Run a self-preparer pre-check: reconcile reported income on W-2s and 1099s to bank deposits and tax returns before submission.
• If you work with a tax representative, sign Form 2848, Power of Attorney, to allow direct IRS contact and faster resolution.
• Keep contemporaneous records of unusual or emergency expenses for 12–24 months; examiners will ask for backup.

Key resources and authoritative references

• IRS Offer in Compromise main page: https://www.irs.gov/payments/offer-in-compromise
• IRS Form 656 and instructions: linked from the main OIC page
• IRS guidance on Reasonable Collection Potential: available via the OIC resources above

Professional disclaimer

This content is educational and not a substitute for personalized tax or legal advice. Rules and fees can change; confirm specific requirements with the IRS and consult a licensed tax professional (CPA, EA, or tax attorney) for help tailored to your situation.

Closing note

Building a competitive financial package takes time and evidence. Thoughtful organization, honest documentation, and a clear narrative explaining your financial constraints improve both efficiency and outcome. If you choose to work with a professional, provide them with complete, organized records to get the best result.