Why the Net Household Income Statement matters

The IRS uses the Net Household Income Statement to judge whether an Offer in Compromise (OIC) represents the most the government can reasonably collect. The document feeds into the IRS’s determination of Reasonably Collectible Income (RCI) and helps the revenue officer or examiner decide whether to accept, reject, or counter your offer. Accurate, well-documented statements increase your odds of a fair evaluation and reduce delays during processing.

In my practice guiding clients through OICs, the most common reason for delay or denial is incomplete supporting documentation rather than the underlying income numbers themselves. A clear statement that ties to bank statements, pay stubs, and bills—organized and explained—goes a long way.

(Authoritative reference: IRS, Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise)

What documents you need to prepare first

Prepare these documents before you start the statement. The IRS will expect verifiable documentation for every item you claim.

  • Photo ID and Social Security numbers for taxpayers and dependents.
  • Recent pay stubs (usually last 30–90 days).
  • Last two years of federal tax returns and W-2s/1099s.
  • Bank statements (checking and savings) for the last 2–3 months; for self-employed, last 6–12 months.
  • Proof of non-wage income: Social Security, unemployment, rental, investment statements.
  • Bills and receipts for recurring expenses: rent/mortgage, utilities, insurance, child care, medical bills, transportation, and court-ordered payments.
  • Statements for assets: retirement accounts, brokerage, vehicles, real property (deeds), and recent valuations.

Also review the forms the IRS requires: Form 656 (Offer in Compromise) and the appropriate Collection Information Statement — for individuals that’s typically Form 433‑A (OIC); for businesses Form 433‑B (OIC). Follow the specific instructions on each form. (IRS forms: https://www.irs.gov/forms-pubs)

Step-by-step: building the Net Household Income Statement

  1. List all household members and relationships. Make clear who contributes income and who is a dependent. Household income includes wages and non-wage receipts for all household members whose income is available to pay the tax.

  2. Gross income section. Tally gross monthly income from every source: wages, self-employment, unemployment, Social Security, pensions, rental income, dividends, alimony, and other receipts. Use recent pay stubs and benefit statements to back each number.

  3. Subtract payroll and legally required deductions. Deduct federal and state withholding, FICA, and mandatory retirement contributions that reduce take-home pay. Do not deduct voluntary contributions that are not payroll-deducted unless they are legally required.

  4. Calculate allowable living expenses. The IRS applies Collection Financial Standards (National and Local Standards) for many budget items (food, clothing, transportation) and allows actual expenses in certain categories (housing, utilities, medical, child care) when documented. Use the national/local standards for conservative amounts and provide receipts or invoices when claiming above-standard actual expenses. (See IRS Collection Financial Standards: https://www.irs.gov/collections/collection-financial-standards)

  5. Include mandatory and recurring obligations. Add student loans, child support, alimony, secured debt payments, and other court-ordered payments. Include reasonable transportation and work-related expenses if documented.

  6. Add extraordinary necessary expenses. Document unreimbursed medical expenses, ongoing treatment costs, and other non-discretionary expenses that exceed normal allowance. Be prepared to provide medical bills, Explanation of Benefits (EOBs), and letters from providers.

  7. Net household income calculation. Subtract total allowable expenses from total monthly household income. Multiply the monthly net shortfall by 12 to show annual RCI or use IRS instructions to present the period they request. This net is the core figure the IRS compares to your tax liability and equity in assets.

  8. Reconcile with bank and asset statements. Ensure the cash balances and asset values you report match your account statements. Explain any large, one-time deposits or transfers and provide supporting documentation.

  9. Complete the official forms. Transfer the net income and documentation to Form 433‑A (OIC) or 433‑B (OIC) as instructed, and complete Form 656 to make the formal offer. Follow the submission checklist closely; missing items cause delays.

How the IRS evaluates expenses and income

  • The IRS uses National and Local Standards for many living expenses and will generally accept those figures unless you can justify higher actual expenses with documentation. National/local standards are publicly available on the IRS website.
  • Reasonably Collectible Income looks at monthly disposable income after allowable expenses and compares it to the tax owed.
  • The IRS also examines equity in assets (bank balances, investments, real estate equity, vehicles). Assets that can be sold or used to pay the tax reduce the acceptance chance for an OIC.

For a deeper look at the Collection Information Statement and how it’s reviewed, see FinHelp’s primer on Understanding the Offer in Compromise Collection Information Statement.

Common mistakes and how to avoid them

  • Under-documenting expenses: Attach bills, invoices, and bank statements for every expense over standard amounts.
  • Omitting household income: Include all household members’ income that’s available to pay the tax.
  • Mismatched numbers: Ensure your bank statements, pay stubs, and forms use consistent date ranges and amounts.
  • Relying solely on estimates: Use exact numbers when possible; where estimates are unavoidable, explain and document the estimate method.
  • Failing to report asset sales or transfers: Explain any transfers within the three years before the offer; these can affect eligibility.

Practical examples (illustrative)

Example 1 — Single parent with medical debt

  • Gross monthly household income: $3,750 (after payroll deductions: $3,200)
  • Housing & utilities: $1,200 (rent documented)
  • Childcare: $400
  • Medical bills (ongoing): $350
  • Transportation & car payment: $300
  • Other documented monthly obligations: $200
    Net monthly disposable income: $3,200 − ($1,200 + 400 + 350 + 300 + 200) = $750
    Annual RCI: $750 × 12 = $9,000
    This RCI helps determine whether an OIC offer equals or exceeds what the IRS expects to collect over a reasonable period.

Example 2 — Self-employed homeowner with equity

  • Self-employment gross receipts vary; use a 12-month average and attach profit/loss statements.
  • The IRS will factor both disposable income and the equity in the home (after allowed mortgage and selling costs) when assessing your offer.

Professional tips to improve acceptance chances

  • Use the correct forms. Form 656 (Offer in Compromise) paired with Form 433‑A (OIC) or 433‑B (OIC) is the standard filing path.
  • Organize documentation chronologically and label exhibits to correspond to each line item.
  • When possible, have pay stubs and bank statements cross-reference the same date range.
  • For amounts above the IRS standards (for example, unusually high medical expenses), provide a written explanation and supporting documents.
  • Consider professional representation for complex asset valuations or business income calculations. In my work, a clear profit/loss schedule and a concise explanation of why cash flow is insufficient often sway examiners to accept realistic offers.

For additional step-by-step preparation and common pitfalls, see FinHelp’s Offer in Compromise Application Checklist: Documents and Common Pitfalls.

After you file: timeline and next steps

  • The IRS reviews the offer and may request additional documentation or clarification. Respond quickly and completely.
  • Processing times vary by caseload and complexity; many applicants wait several months. If your financial situation changes materially while the offer is pending (job loss, major medical event), notify the IRS immediately and provide updated documentation.
  • If the IRS rejects your offer, you may request reconsideration, appeal the decision through IRS Appeals, or explore alternatives such as an installment agreement or bankruptcy—each has different consequences; discuss options with a tax professional.

For guidance on maximizing acceptance, review our article on Navigating the Offer in Compromise Financial Statement: Tips to Maximize Acceptance.

Closing notes and disclaimer

A carefully prepared Net Household Income Statement is one of the strongest tools you have when applying for an Offer in Compromise. It must be truthful, fully documented, and tied directly to supporting records. In my experience, applicants who invest the time to organize and justify each line item get faster, fairer results.

This article is educational and does not replace personalized tax advice. For help preparing an OIC, consult a qualified tax professional or attorney. Authoritative IRS resources include the Offer in Compromise overview and form pages: https://www.irs.gov/individuals/offer-in-compromise and https://www.irs.gov/forms-pubs.

Last reviewed: 2025.