Overview

An Offer in Compromise (OIC) gives some taxpayers a path to resolve federal tax debt for less than the full amount owed when the IRS determines that collection of the full liability is unlikely or would create an undue hardship. Preparing a strong OIC package means doing more than filling out forms — it requires accurate financial disclosure, supporting documentation, and an offer tied to the IRS’s valuation method (Reasonable Collection Potential, or RCP).

In my 15+ years helping clients with tax resolution, I’ve seen the difference a complete, well-organized package makes: offers with full documentation and realistic numbers are far more likely to move forward and avoid requests for additional information or outright denial.

(Authoritative IRS guidance: Offer in Compromise main page: https://www.irs.gov/payments/offer-in-compromise.)

Step-by-step: What to include in a competitive OIC package

  1. Completed Form 656 (Offer in Compromise)
  • Sign and date the form. You must choose your payment option (lump-sum or periodic).
  • Include the $205 application fee unless you qualify for the low-income waiver (see IRS criteria).
  • Form details and filing instructions: https://www.irs.gov/forms-pubs/about-form-656
  1. Financial statement: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses
  • These forms feed the IRS’s RCP calculation and must reflect current numbers.
  • Provide supporting documents for every line (bank statements, paystubs, benefit award letters).
  1. Supporting documentation
  • Recent pay stubs (30–60 days). 2–3 months of bank statements.
  • Last two tax returns (filed). Proof of monthly government benefits, unemployment, or child support.
  • Receipts for recurring, non-discretionary expenses: rent/mortgage, utilities, insurance, medical bills.
  • Proof of extraordinary expenses (medical bills, child care, court-ordered payments).
  • Asset documentation: vehicle titles, brokerage account statements, equity estimates.
  1. A cover letter and case summary
  • One page summarizing your situation, reasons for the OIC, and what you’re submitting.
  • Highlight any special circumstances (disability, major medical expenses, sudden job loss).
  1. Payment or payment proposal
  • Lump-sum cash offer: pay 20% with the application and the remainder within 5 months after acceptance.
  • Periodic payment offer: begin payments with the application and continue while the IRS evaluates the offer.
  • More on payment options and rules: IRS OIC overview (https://www.irs.gov/payments/offer-in-compromise).

How the IRS evaluates your offer: Reasonable Collection Potential (RCP)

The IRS calculates RCP as the total value it believes it can collect from you now and in the near future. RCP = equity in assets + future income available for collection. Key points:

  • Asset equity: market value minus secured debt (for example, equity in real estate or vehicles). Use conservative, documented valuations (recent statements, Blue Book value, appraisal).
  • Future income available: monthly disposable income (income minus allowable living expenses per IRS Collection Financial Standards) multiplied by the number of months left in the Collection Statute of Limitations.
  • The IRS compares your offer to the RCP. If your offer is equal to or greater than RCP, approval is more likely.

Reference: IRS Offer in Compromise guidance and Collection Financial Standards (https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards).

Practical checklist before filing

  • Use the IRS Offer in Compromise Pre-Qualifier tool to check basic eligibility (helps avoid wasted filing fees).
  • Ensure all required tax returns are filed; the IRS will not accept an OIC if returns are unfiled.
  • Assemble 3–6 months of bank statements and paystubs.
  • Create a concise cover letter explaining extraordinary circumstances.
  • Double-check math on your Form 433 and Form 656; math errors delay processing.
  • Consider low-income waiver eligibility for the $205 application fee.

Useful FinHelp guides:

Common mistakes that lead to denials

  • Incomplete documentation: missing bank statements, paystubs, or proof of expenses.
  • Overstating expenses or understating income intentionally — the IRS cross-checks information.
  • Submitting outdated or inconsistent valuations for assets.
  • Failure to file required tax returns or to stay current with estimated tax payments and future tax obligations.
  • Not responding promptly to IRS requests for additional information.

See our related article on Common Financial Mistakes That Doom Offer in Compromise Applications for more examples: https://finhelp.io/glossary/common-financial-mistakes-that-doom-offer-in-compromise-applications/

Timing and what to expect after submission

  • Processing time varies. Typical processing often takes several months (commonly 4–6 months), but it can be longer depending on backlog and complexity. The IRS may request additional documentation during review.
  • If you submit a periodic payment offer, continue making the required payments while the IRS evaluates your package.
  • If the IRS rejects your offer, you have appeal rights (the IRS will explain next steps and timelines). You can request reconsideration or appeal to the U.S. Tax Court in some circumstances.

(IRS processing timelines and appeal information: https://www.irs.gov/payments/offer-in-compromise)

When to consider alternatives

An OIC is not the only path. Consider other options when more appropriate:

  • Installment Agreement: If you can pay over time without undue hardship, a long-term installment agreement may be simpler and faster.
  • Currently Not Collectible (CNC) status: If you have zero reasonable collection capacity, CNC can stop collection for a time without settling the debt.
  • Bankruptcy: In limited cases, bankruptcy may discharge tax debts — consult a bankruptcy attorney.

See our comparison guide: Choosing Between an Installment Agreement and an Offer in Compromise: https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-an-offer-in-compromise/

Professional tips from practice

  • Be transparent: the IRS reviews third-party data, so errors or omissions undermine credibility.
  • Organize documents chronologically and use a simple index for the IRS reviewer.
  • Provide evidence for extraordinary expenses (medical statements, collection notices, eviction papers).
  • If you’re near retirement or have limited future income, explain how collection would be impossible without undue hardship.
  • When in doubt, get professional help. A qualified tax resolution specialist, enrolled agent, or tax attorney can improve accuracy and avoid procedural pitfalls.

Example (short, anonymized)

A client with $40,000 in unpaid tax and limited disposable income submitted a complete OIC package with detailed medical expense records and a realistic lump-sum offer tied to their banked savings. The IRS accepted an $8,000 settlement because the documented RCP supported that amount. Key to success: precise documentation and a cover letter that framed unusual medical expenses.

Disclaimer

This article is educational and does not constitute tax, legal, or financial advice for your specific situation. Rules for Offers in Compromise can change; consult the IRS directly or a qualified tax professional for personalized guidance. Official IRS resources cited in this article include the Offer in Compromise main page (https://www.irs.gov/payments/offer-in-compromise), Form 656 guidance (https://www.irs.gov/forms-pubs/about-form-656), and the Collection Financial Standards (https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards).

Further reading

If you plan to prepare an OIC, start with the IRS pre-qualifier and assemble your financial documents before you submit.