How to Build a Financial Package for an Offer in Compromise

Overview

A financial package is the heart of an Offer in Compromise (OIC) submission. It persuades the IRS that you cannot reasonably pay the full tax liability now or in the foreseeable future. The IRS evaluates your assets, income, allowable living expenses, and equity to calculate a “reasonable collection potential” (RCP). Your package must be accurate, well-organized, and supported by primary documents. For authoritative guidance, see the IRS Offer in Compromise page and the Form 656 instructions (IRS) (https://www.irs.gov/individuals/offer-in-compromise).

Professional note: In my practice advising taxpayers on OICs for more than a decade, the single biggest difference between accepted and rejected offers has been the quality and honesty of documentation. A clear, verifiable package reduces back-and-forth and shows examiners you’re cooperating.

Why the IRS needs a financial package

The OIC program is designed to resolve tax debts when the IRS determines the amount owed cannot be collected in full within a reasonable period. The IRS uses the financial package to:

• Verify claimed income and allowable expenses.
• Establish equity in assets (bank accounts, vehicles, real estate, investments).
• Estimate future collectibility (RCP) to see whether an offer is equal to or greater than what the IRS could reasonably collect.

The IRS publishes the forms and guidance you must use; see Form 656 (Offer in Compromise) and the associated Form 433-A (OIC) or 433-B (OIC) for individuals and businesses respectively (IRS forms and instructions: https://www.irs.gov/forms-pubs).

Core documents to include

Below is a checklist of necessary paperwork. Provide originals only when requested; submit copies with clear labels and a table of contents.

• Completed Form 656 (Offer in Compromise) — official application (IRS: Form 656).
• Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses — detailed financial statement.
• Recent federal tax returns (typically last 1–3 years).
• Proof of current income: pay stubs (last 2–3 months), unemployment statements, Social Security award letter, or profit-and-loss for business owners.
• Bank statements (3–12 months, depending on request).
• Proof of monthly expenses: rent/lease, mortgage statements, utilities, auto payments, insurance, childcare, and medical bills.
• Asset verification: vehicle titles and loan payoff, real estate deeds and mortgage payoffs, retirement account statements, brokerage statements, and recent appraisals if available.
• Proof of extraordinary expenses: medical receipts, bankruptcy filings, court-ordered payments (child support, alimony).
• Identification and dependent documentation: driver’s license, Social Security numbers, proof of custody if claiming dependent-related expenses.

For an expanded checklist and formatting tips, see our page “What to Include in a Financial Disclosure for an Offer in Compromise” (internal: https://finhelp.io/glossary/what-to-include-in-a-financial-disclosure-for-an-offer-in-compromise/).

Step-by-step: assembling the package

1. Create a cover letter summarizing your situation in plain language. State the tax years and amounts owed, the basis of the offer (doubt as to collectibility, effective tax administration, or doubt as to liability), and whether you’re submitting a lump-sum or periodic payment offer.
2. Prepare Form 656 and the correct Form 433 (A or B). Use the most recent versions from the IRS website and follow the Form 656 instructions closely (IRS).
3. Build a table of contents and numbered exhibits. Label every exhibit to match citations in Form 433.
4. Document income first: include pay stubs, statements for government benefits, or a current year profit-and-loss for self-employed taxpayers.
5. Support every expense line with a primary source: lease agreement for rent, utility bills for monthly utilities, notarized receipts for recurring outlays, and invoices for medical costs.
6. Value assets conservatively and attach evidence: recent statements for retirement accounts, loan payoff letters for vehicles, and copies of property tax assessments or appraisals for real estate.
7. Reconcile numbers: totals on Form 433 must match the sum of attachments and the spreadsheet you include.
8. Make copies: keep a complete, dated copy of the entire submission for your records.

How the IRS evaluates value and payment ability

The IRS computes a reasonable collection potential (RCP): typically the equity in your assets plus an amount based on your future income after allowable expenses. The RCP helps determine whether the offer amount is equal to or greater than what the IRS could expect to collect through enforced collection methods. Do not guess at values — provide documentary support and, if in doubt, obtain professional valuations or pay-off quotes. See Form 656 instructions for the IRS approach to evaluation (IRS).

Practical tip: When listing vehicle equity, use the Kelly Blue Book private sale value or a dealer trade-in value and subtract the loan payoff amount; include recent statements to prove the loan principal remaining.

Common mistakes that cause denials

• Missing or inconsistent documentation (mismatched bank balances vs. bank statements).
• Undercalculating necessary living expenses or failing to include mandatory payments like health insurance and child support.
• Inflated or unsupported expenses — the IRS will challenge unverifiable claims.
• Not including recent tax returns or filing past-due returns before OIC submission.

For more denial-prevention tips, see our article “Avoiding Common Mistakes on an Offer in Compromise Application” (internal: https://finhelp.io/glossary/avoiding-common-mistakes-on-an-offer-in-compromise-application/).

Offer amount strategy and payment options

You can propose a lump-sum offer (paid in five or fewer payments) or a periodic payment offer (paid over time). The form and instructions explain the deposit and payment requirements. The IRS requires a non-refundable application fee of $205 unless you qualify as a low-income taxpayer; check current fees on the IRS OIC page (IRS).

Offer strategy guidance:

• If your RCP is low (little equity and little disposable income), a lower offer has a better chance.
• A lump-sum paid quickly may be more attractive to the IRS than long-term periodic payments, depending on the circumstances.
• Ensure your offer is at least equal to the RCP; offers significantly under RCP are unlikely to succeed.

Timeline and follow-up

Processing times vary widely. Historically, IRS processing could take 6–12 months depending on backlog and complexity. The IRS may issue requests for additional documentation; respond promptly (typically within 30 days unless additional time is granted). If your offer is rejected, you can appeal the decision through the Collection Appeals Program — include the reasoned basis for your appeal and any new documentation.

When to hire help

An experienced tax professional (CPA, EA, or tax attorney) can:

• Ensure the correct forms and up-to-date IRS guidance are used.
• Accurately calculate RCP and recommend a realistic offer amount.
• Prepare valuations, appraisals, and detailed spreadsheets that examiners prefer.

In my experience, professional representation is especially valuable when there are complex assets (business interests, multiple properties) or when an offer is based on “effective tax administration” rather than purely inability to pay.

Sample document order (ideal submission)

1. Cover letter and table of contents
2. Completed Form 656
3. Form 433-A (OIC) or 433-B (OIC) with supporting schedules
4. Recent tax returns and proof of filing
5. Income verification (pay stubs, benefit letters)
6. Bank statements and asset statements
7. Expense documentation and extraordinary expense proof
8. Valuations, pay-off statements, and third-party invoices
9. Signed authorizations if a representative is filing on your behalf

Final checklist before you submit

• Are all figures consistent across forms and attachments?
• Are bank statements and pay stubs recent and legible?
• Did you include the correct application fee or a low-income certification?
• Do you have copies of everything you send?

Important legal and practical disclaimers

This article is educational and does not constitute tax advice. OICs are fact-specific — consult a qualified tax professional about your situation. For official IRS rules, current fees, and form downloads, refer to the IRS Offer in Compromise page and Form 656 instructions (https://www.irs.gov/individuals/offer-in-compromise).

Further reading on FinHelp:

• Filing an Offer in Compromise: Eligibility, Process, and Tips (https://finhelp.io/glossary/filing-an-offer-in-compromise-eligibility-process-and-tips/)
• What to Include in a Financial Disclosure for an Offer in Compromise (https://finhelp.io/glossary/what-to-include-in-a-financial-disclosure-for-an-offer-in-compromise/)
• Avoiding Common Mistakes on an Offer in Compromise Application (https://finhelp.io/glossary/avoiding-common-mistakes-on-an-offer-in-compromise-application/)

Authorities consulted: Internal Revenue Service, Offer in Compromise (IRS.gov); Form 656 and instructions (IRS.gov).

If you want, I can convert the checklist into a printable two-page packet or provide sample wording for a cover letter and expense affidavits.