Introduction

An Offer in Compromise (OIC) can be a lifeline when you cannot pay your tax debt in full. The IRS uses the documents you submit to determine your Reasonable Collection Potential (RCP), the core number that guides whether it will accept an offer and how much it will require. Preparing clear, complete proof of income is one of the single most important steps in presenting a credible OIC. The guidance below walks through exactly what to gather, how to organize it, and common pitfalls that generate delays or denials.

Why the IRS cares about proof of income

The IRS’s goal is to determine whether the tax debt can realistically be collected. To do that it examines:

  • Gross income and types of income (wages, self-employment, pension, Social Security, rental, investment, etc.)
  • Net cash flow after allowed monthly expenses
  • Liquid assets and available equity in nonexempt assets

This evaluation depends on documentary evidence—pay stubs and W-2s alone are not enough when income is variable or comes from multiple sources. The IRS explains the OIC process and the documentation it expects on its Offer in Compromise overview (IRS.gov/offer-in-compromise).(https://www.irs.gov/individuals/offer-in-compromise)

Core documents to prove income (checklist)

Collect these documents before you complete Form 656 and the required collection information statement (Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, or Form 433-F in other collection situations). The IRS reviews these documents to calculate RCP. See the official Form 656 and collection statement pages for details (IRS Form 656 page).(https://www.irs.gov/forms-pubs/about-form-656)

Required items:

  • Recent pay stubs: At least the last 2–3 pay periods; collect the last 2–3 months if pay is weekly or biweekly.
  • W-2s and 1099s: Last tax year’s W-2 for wages; 1099-MISC/NEC, 1099-K, 1099-INT, etc., for non-wage income.
  • Federal income tax returns: Last 2–3 years of filed returns (Form 1040 and schedules). If returns are unfiled, file them before applying—unfiled returns often block OIC processing.
  • Bank statements: Last 3–6 months for all personal and business accounts. Highlight recurring deposits that match reported income.
  • Profit & loss and balance sheets: For self-employed taxpayers, a current year-to-date profit and loss statement and balance sheet. Provide supporting invoices and receipts for major items.
  • Social Security, pension, unemployment statements: Official award letters or 1099-R/SSA-1099 showing amounts and benefit periods.
  • Rental income documentation: Lease agreements, rent rolls and bank deposit records.
  • Court-ordered income documents: Child support or alimony judgments, when they affect available cash flow.

Supporting documents that strengthen an application

  • Invoices and appointment schedules: For freelancers and contractors, provide signed client contracts, invoices and proof of deposits.
  • Documentation of irregular income: If seasonal or fluctuating, include a 12-month history (bank deposits tied to invoices or 1099s) to show realistic monthly averages.
  • Evidence of job loss or medical hardship: Unemployment award letters, doctor statements, or documentation of out-of-pocket medical costs.
  • Household expense verification: Copies of leases, mortgage statements, utility bills and insurance premiums to substantiate monthly expense claims on the collection statement.

How to present variable or self-employed income

Self-employed taxpayers require particular care. I routinely ask clients to produce a three-part packet:

1) Year-to-date profit & loss prepared by a bookkeeper or tax preparer, showing gross receipts and major expense categories.
2) Copies of the last two years’ Schedule C (or relevant business tax returns) to show historical income.
3) Bank statements and invoices that reconcile deposits to reported receipts.

When income varies, the IRS will use a realistic monthly average. Showing a clear paper trail that converts gross receipts into net cash available for living expenses and potential offer payments reduces IRS skepticism.

Common documentation mistakes and how to avoid them

  • Omitting income sources: Do not omit side gigs, gig-economy payments, rental receipts, nor occasional 1099 payments. The IRS has data-matching and will request missing documentation.
  • Submitting partial bank records: Provide continuous statement ranges (e.g., first to last day of each month). Gaps or missing pages prompt requests and slow review.
  • Using internal-only reports without backup: A one-page spreadsheet isn’t sufficient without source invoices, bank deposits, or a preparer’s declaration.
  • Failing to explain transfers: Large bank transfers between accounts or family transfers should be annotated—label them and provide memos or third-party statements showing source and purpose.

Organization and submission tips

  • Create a cover letter and index: List each document with page numbers and short notes. The IRS reviewers process many packets; a clear index can make reviewers’ jobs easier and reduce follow-up requests.
  • Use simple labeling: “W-2 2024”, “Bank – Chase – Jan–Mar 2025”, “P&L YTD 2025 (prepared 05/01/2025)”.
  • Don’t send originals unless specifically requested. Send certified copies or clear scans. Keep originals in case the IRS requests them later.
  • Be truthful and consistent: Discrepancies between your Form 433 series and submitted documents lead to denials. If an honest error exists, explain it in the cover letter and provide corrected documents.

How the IRS treats proof during review

The IRS calculates RCP by combining net realizable equity in assets plus monthly net income available for collection. They compare your offer against this value. Accurate proof of income reduces arbitrary adjustments and improves the odds of an acceptable offer. For procedural details and forms, see the IRS Offer in Compromise and Form 656 guidance.(https://www.irs.gov/individuals/offer-in-compromise)(https://www.irs.gov/forms-pubs/about-form-656)

Handling special situations

  • Recent job loss: Provide termination letters, unemployment statements and a modified budget showing reduced income and increased job-search costs.
  • Seasonal workers: Provide year-round averages based on the last 12 months of deposits and tax returns.
  • Rental property transients: Provide signed lease agreements, a 12-month rent roll, and proof of property expenses.

Red flags that can trigger further scrutiny

  • Large unexplained deposits
  • Significant differences between bank deposits and reported income
  • Missing or incomplete tax returns
  • Frequent business-to-person cash transfers without invoices

Sample evidence checklist (condensed)

  • Form 656 and completed Form 433-A (OIC) or Form 433-B (OIC)
  • 2–3 recent pay stubs or 3 months of prints for variable pay
  • W-2s and 1099s for the last tax year
  • Most recent 2–3 years of tax returns
  • 3–6 months of bank statements (personal and business)
  • Year-to-date Profit & Loss and supporting invoices
  • Social Security/pension award letters or 1099s
  • Lease/mortgage statements and major monthly bills

Practical timeline and follow-up

Expect the OIC review to take several months once your package is complete. The IRS may request additional information; respond quickly and in writing. If your financial circumstances change (new job, significant increase in income), update the IRS immediately—an OIC submitted with inaccurate current information can be returned or rejected.

Professional help and internal resources

Working with an experienced tax professional (CPA, enrolled agent, or tax attorney) who has handled many OICs can streamline document preparation and reduce mistakes. For guidance on assembling the broader financial package, see our articles on “Preparing a Financial Package for an Offer in Compromise: Worksheets and Documents” and “Preparing the Financial Statement for an Offer in Compromise” which include checklists and sample spreadsheets.

Final professional tips (from practice)

In my practice I see two traits that separate successful OIC submissions from those that fail: thorough documentation and clarity. Provide clear, reconciled numbers; anticipate questions a reviewer will ask; and present explanations for anything that looks unusual. Small investments in organization—and a preparer who knows IRS collection rules—often pay off by preventing delays and improving negotiation outcomes.

Disclaimer

This article is educational and does not constitute tax advice for your specific situation. Rules and forms change; consult a qualified tax professional or the IRS directly for personalized guidance. Official IRS resources: Offer in Compromise overview and Form 656 information (irs.gov).(https://www.irs.gov/individuals/offer-in-compromise)(https://www.irs.gov/forms-pubs/about-form-656)

Authoritative sources