Common Financial Mistakes That Doom Offer in Compromise Applications

Why accuracy matters in an Offer in Compromise

The IRS decides OICs by comparing what you offer to what it thinks it can collect from you (your Reasonable Collection Potential or RCP). The single most common reason for denial is not that a taxpayer asked for ‘too little’—it’s that the financial package contains errors or missing evidence that make the IRS doubt the offer’s accuracy. In my 15 years helping taxpayers prepare OICs, I see the same avoidable mistakes again and again. Correct these and you dramatically improve your odds.

(Authoritative source: IRS Offer in Compromise page — https://www.irs.gov/individuals/offer-in-compromise)

Top financial mistakes that doom OIC applications—and how to fix them

1) Underreporting or omitting income

• What happens: Leaving out side gigs, rental income, gig-platform receipts, bank interest, or cash payments makes your financial picture look worse than it really is. The IRS spots mismatches between reported income and third‑party information and will treat omissions as lack of candor.
• How to fix it: Reconcile bank statements, 1099s, and payroll records before you file. Include all income streams on Form 433‑A or 433‑B and attach supporting statements (pay stubs, platform statements, lease agreements).
• Pro tip from practice: I once found a client’s rejected OIC was avoidable—he’d omitted intermittent consulting revenue deposited into a personal account. Adding those deposits and a short, dated ledger resolved the discrepancy at appeal.

2) Inflating or misclassifying expenses

• What happens: Claiming excessive or non‑allowable personal expenses (or treating business costs as personal) raises red flags. The IRS uses standardized expense guidelines and will disallow vague or unsupported entries.
• How to fix it: Use only verifiable, ordinary and necessary expenses. Keep receipts and bank records. When claiming vehicle, housing, medical, or childcare expenses, document amounts and show they are recurring. If you run a business, separate business and personal expenses and use Form 433‑B for business owners.

3) Missing or incomplete documentation

• What happens: Omitting the required forms (Form 656, Form 433‑A/433‑B), bank statements, pay stubs, or proof of asset valuations typically leads to immediate delay or denial.
• How to fix it: Submit a complete financial package. Use the IRS instructions checklist and the documentation worksheets found on practice resources. I recommend a pre‑submission checklist: most recent tax returns, three months of pay stubs, three months of bank statements, titles/registration for vehicles, statements for brokerage or retirement accounts, and documentation for non‑wage income.

4) Hiding assets or transfers before filing

• What happens: Transfers of cash, property, or valuables to relatives or friends before filing an OIC are treated as “dissipation” and can cause denial and potential collection actions.
• How to fix it: Do not move money or property to avoid collection. If you made transfers for legitimate reasons (medical, court‑ordered support), document and be ready to explain them.

5) Inconsistent records or unexplained bank activity

• What happens: Large unexplained deposits or withdrawals trigger IRS requests for clarification and can be treated as income.
• How to fix it: Keep a clear ledger and annotate deposits. When large transactions exist, supply supporting documentation—sale contracts, gifts with affidavits, loan promissory notes, or settlement statements.

6) Not updating income or filing returns

• What happens: The IRS requires current tax returns to be filed and current tax liabilities considered. Not filing recent returns or failing to report new income since you prepared the package undermines credibility.
• How to fix it: File all required returns before or with the OIC. Include amended returns if relevant.

7) Misunderstanding allowable expense standards and RCP

• What happens: Taxpayers assume the IRS will accept their personal budget—but the IRS applies its own allowable living expense standards (and will consider equity in assets when calculating RCP).
• How to fix it: Study the Reasonable Collection Potential concept and prepare to justify any expenses that differ from IRS norms. Consider using the IRS OIC pre‑qualifier and consult the guidance in “How Offer in Compromise Amounts Are Calculated.” (See internal resource links below.)

A practical OIC preparation checklist (action steps)

• Gather required forms: Form 656 (Offer in Compromise) and Form 433‑A (individual) or Form 433‑B (business). (IRS instructions: https://www.irs.gov/pub/irs-pdf/f656.pdf and https://www.irs.gov/pub/irs-pdf/f433a.pdf)
• Reconcile all income sources: W‑2s, 1099s, bank deposits, platform statements, rental ledgers.
• Collect proof of assets and their equity: vehicle titles (loan balance), real estate (market value and mortgages), retirement statements (not all retirement is available for collection but still reported).
• Document recurring expenses with receipts and account statements.
• Explain any extraordinary or one‑time income/expenses in a short cover letter.
• Don’t forget supporting documents for special circumstances: medical bills, disability, recent job loss, or natural disaster recovery.
• Use the IRS OIC pre‑qualifier tool and read the Form 656 instructions carefully (IRS OIC page: https://www.irs.gov/individuals/offer-in-compromise).

What to expect about payments, fees, and timelines

• Payment options: For a lump‑sum cash offer you generally submit an initial payment (often 20% of the offer) with the application; for a periodic payment offer you typically submit the first proposed payment and continue as proposed while the IRS evaluates the offer. Low‑income applicants may be exempt from fees. Always confirm current payment and fee rules on the IRS site before submitting.
• Timing: The IRS may take several months to a year to process an OIC, depending on complexity and whether additional documentation is requested.
• Costs: There can be an application fee and professional fees if you engage a tax representative. Fees and payment rules change; check the IRS OIC instructions or the Form 656 instructions for current amounts.

(Confirm current fee and initial payment rules at: https://www.irs.gov/individuals/offer-in-compromise)

If the IRS denies your offer

• Read the denial letter carefully; it will explain the reason(s). Typical reasons include inaccurate disposable income, undisclosed assets, or lack of supporting documentation.
• Appeal rights: You can request the IRS Office of Appeals or file a Collection Due Process (CDP) appeal in certain cases. The denial notice will explain appeal procedures and deadlines.
• Reapplying: If your financial situation changes materially (job loss, medical emergency), you can reapply. When reapplying, correct prior errors, strengthen documentation, and state the material change clearly.

See our guide on “Options After a Denied Offer in Compromise” for practical next steps and timelines.

When to get professional help

Hire a CPA, enrolled agent, or tax attorney if any of the following are true:

• Your financial picture is complex (business income, rental properties, multiple 1099s).
• You suspect the IRS will challenge a particular valuation or expense.
• You face potential fraud or criminal referral risk.

In my practice, clients who get pre‑filing advice and a professional quality financial package have materially higher success rates. A practitioner can also communicate with the IRS on your behalf and reduce correspondence errors.

Useful internal resources

• Read our overview: Offer in Compromise: Qualifying, Applying, and Pitfalls for a step‑by‑step application walkthrough.
• Use the documentation checklist: Preparing an Offer in Compromise: Documentation Checklist to assemble your financial package.

Final checklist: avoid these last‑minute mistakes

• Don’t guess—verify. Reconcile bank records and pay stubs before submission.
• Don’t omit small income sources; the IRS looks at third‑party reports.
• Don’t move assets before filing.
• Don’t submit vague statements—provide documentation and brief explanations.
• If you’re unsure about expense eligibility, document it and get a professional opinion.

Professional disclaimer: This article is educational and does not replace personalized tax advice. OIC rules change; verify current application fees, filing instructions, and forms at the IRS Offer in Compromise page (https://www.irs.gov/individuals/offer-in-compromise) or consult a qualified tax professional.

Authoritative sources: IRS Offer in Compromise (https://www.irs.gov/individuals/offer-in-compromise) and Form 656/Form 433 instructions (linked above). Additional practical internal resources are linked in the article.