Why documentation matters

Submitting a complete, well‑organized packet helps the IRS determine your Reasonable Collection Potential (RCP) and improves the odds your Offer in Compromise will be reviewed and processed without delays. The IRS requires accurate financial statements and supporting documents to evaluate whether you can pay the full tax debt now or over time (IRS Publication 1854) [https://www.irs.gov/pub/irs-pdf/p1854.pdf].

Quick documentation checklist

  • Required IRS forms: Form 656 (Offer in Compromise) and the correct Collection Information Statement — Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses. (See IRS forms and instructions.)
  • Application fee (generally $205 as of 2025) or waiver documentation for low‑income applicants (Pub. 1854).
  • Initial payment: 20% of a lump‑sum offer or the first installment for a periodic payment offer, if applicable.
  • Proof of income: recent pay stubs, year‑to‑date employer statements, Social Security or unemployment award letters.
  • Bank statements for the past 3–6 months (all pages).
  • Asset documentation: vehicle titles, mortgage statements, deeds, retirement account statements, brokerage accounts.
  • Monthly living expenses: lease/mortgage statements, utility bills, insurance premiums, child support/alimony, medical bills, and receipts for regular non‑discretionary costs.
  • Proofs of special circumstances: layoffs, medical records, termination notices, bankruptcy discharge, divorce decrees, settlement letters.
  • Tax compliance evidence: tax return transcripts or copies showing all required returns filed and any required estimated tax payments made.

Required forms and how to complete them

  • Form 656 — Complete all sections, sign and date. Include the application fee or fee waiver paperwork as directed by the form instructions.
  • Form 433‑A (OIC) — Used by individuals to list monthly income, expenses, assets and liabilities. Be conservative and document each line item with supporting records. For businesses use Form 433‑B (OIC). (Form links: Form 656 and Form 433 series on IRS.gov.)

Types of supporting evidence (what the IRS checks)

  • Income verification: pay stubs, letter from employer, SSA benefit statements, unemployment notices, child support receipts.
  • Bank records: three to six months of statements to document balances and recurring transfers.
  • Asset verification: titles, vehicle valuations (e.g., NADA/KBB printouts), closing statements for real estate, statements for IRAs/401(k)s.
  • Expense verification: receipts, invoices, court orders for child support, medical bills, long‑term care costs.
  • Event proofs: termination letters, medical discharge, eviction notices, or other documents showing a change in ability to pay.

Special situations

  • Businesses: include profit & loss statements, balance sheets, payroll tax records, business bank statements and any corporate resolutions authorizing the offer.
  • Bankruptcy: the IRS will generally not accept an OIC while a bankruptcy case is open. If bankruptcy is recently closed, include discharge papers and trustee statements.
  • Liens and levies: provide liens releases, payoff letters, and settlement documentation if you have previously negotiated assets.

Fees, initial payments, and low‑income waiver

  • Application fee: generally $205 (IRS). Low‑income applicants may qualify for a waiver — check Publication 1854 for criteria.
  • Lump‑sum cash offers: include 20% of the total offer with Form 656. For periodic (installment) offers, include the first proposed installment payment with the application. Details are in Form 656 instructions and Pub. 1854.

How to organize and submit your packet

  1. Create a cover letter listing enclosed documents and your contact information.
  2. Place forms and attachments in a logical order: Form 656, Form 433, application fee/initial payment, income docs, bank statements, assets, expense proofs, special circumstance evidence.
  3. Number pages and add a table of contents if packet is large. Keep copies of everything.
  4. Mail to the address shown on Form 656 instructions or submit online if eligible (see IRS e‑filing options).

Common mistakes to avoid

  • Incomplete or unsigned forms — unsigned Form 656 is not valid.
  • Using Form 433‑F instead of the OIC version (use 433‑A (OIC) or 433‑B (OIC) as instructed).
  • Leaving out bank statements or only providing partial pages.
  • Overstating expenses without backup documentation — the IRS requires receipts or court orders for recurring obligations.
  • Failing to stay current with tax filings and estimated tax payments during the OIC review — falling out of compliance can lead to a denial.

Timeline and next steps after submission

  • Processing times vary; many OICs take several months to a year depending on complexity and IRS inventory.
  • The IRS may request additional documents — respond quickly and keep copies.
  • If denied, you can appeal the decision using the Collection Appeal Program or request reconsideration (see IRS procedures).

Practical tips from my experience

  • Start by running the IRS Offer in Compromise Pre‑Qualifier tool to see if you meet basic screens before gathering a full packet (IRS.gov).
  • Be factual and conservative: undervaluing assets or omitting income increases the risk of denial or later collection.
  • Work with a tax professional for complex cases (business owners, recent bankruptcy, high asset balances) — in my practice, organized packets with clear proof of changed circumstances materially improve outcomes.

Related FinHelp guides

Sources and further reading

Disclaimer: This article is educational and does not constitute legal or tax advice. For recommendations tailored to your facts, consult a licensed tax professional or attorney.