Quick checklist: what you must submit

  • Completed Form 656, Offer in Compromise (including required signatures). See the IRS instructions for Form 656 for current filing rules and fees (IRS).
  • A completed Collection Information Statement: Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses.
  • Required supporting documents: recent pay stubs, bank statements, proof of monthly bills (mortgage/rent, utilities, medical), copies of asset valuations or appraisals, and documentation of unusual expenses or hardship.
  • Application fee and initial payment as required by the IRS (fees may be waived for low‑income taxpayers). Details: https://www.irs.gov/payments/offer-in-compromise (IRS).

Who typically qualifies?

The IRS accepts OICs under three legal grounds:

  1. Doubt as to collectibility (DAC): you cannot pay the full tax debt now or in the foreseeable future. The IRS measures this against your Reasonable Collection Potential (RCP).
  2. Doubt as to liability: there’s a legitimate question about whether the tax assessed is correct.
  3. Effective tax administration (ETA): full payment would create economic hardship or be unfair even if liability and collectibility exist.

To be considered, taxpayers generally must have filed all required returns, be current with estimated tax obligations, and not have a collection statute that already expired. If you’re in bankruptcy, consult counsel — bankruptcy can change how an OIC is handled.

(Source: IRS Offer in Compromise page.)

How the IRS evaluates your ability to pay

The IRS uses the Collection Information Statement(s) to calculate your Reasonable Collection Potential (RCP). RCP combines:

  • the net realizable value of your assets (equity after secured debt);
  • plus the monthly disposable income the IRS says can be applied to taxes over a calculation period.

If your offer is less than the RCP, approval is unlikely. That’s why accurate asset valuation and correct expense documentation matter.

Practical documentation tips (what wins cases)

  • Be complete and organized: include a cover sheet listing all attachments, labeled exhibits, and a short summary of key facts.
  • Verify income sources: provide pay stubs, year‑to‑date income, Social Security statements, or business profit/loss statements.
  • Substantiate expenses: recurring bills, child‑care costs, medical bills, and court‑ordered payments. For unusual expenses, provide receipts, invoices, or sworn statements.
  • Prove asset values: recent statements for investment accounts, a broker statement for securities, or a professional appraisal for real estate or business goodwill.
  • Document hardship: statements from doctors, evidence of job loss, or proof of excessive medical debt help with ETA claims.

In my experience working with clients, offers that present clear, verifiable evidence of limited future ability to pay have the best chance of success.

Strategy: making a realistic offer

  • Calculate a defensible offer based on RCP, not emotion. The IRS expects to recover its RCP; offer slightly below RCP when justified by special circumstances.
  • Choose the correct payment option: lump‑sum cash (20% of the offer included with application), periodic payments (first payment required), or deferred offers (rare; require strong reasoning). See IRS page for current payment rules.
  • Use IRS allowable expense standards carefully. The IRS applies national and local standards for certain living expenses — don’t inflate amounts without documentation.

Common mistakes to avoid

  • Submitting incomplete or inconsistent forms (Form 656 and Form 433 series).
  • Failing to attach proof for claimed expenses or asset valuations.
  • Offering an amount well below documented RCP without a persuasive ETA justification.

If your offer is denied

You have appeal rights and can request reconsideration. Denials frequently succeed on reconsideration when new, verifiable information about income, assets, or hardship is presented. See our guide on recovering after a denial and how to prepare a reconsideration packet.

For more on preparing your financial statement and documenting hardship, see these related resources on FinHelp:

Authoritative sources

  • IRS: Offer in Compromise (forms, fees, and filing instructions): https://www.irs.gov/payments/offer-in-compromise
  • IRS Form 656 and Form 433‑A (OIC) / 433‑B (OIC) instructions (current forms and guidance): available from the IRS website.

Professional disclaimer
This article is educational and does not replace personalized tax advice. For case‑specific guidance, consult a licensed tax professional, CPA, or tax attorney experienced in Offer in Compromise cases.