Overview

The Offer in Compromise (OIC) Financial Statement is the financial backbone of any OIC submission. It’s not just paperwork — it’s the IRS’s window into whether you can realistically pay your tax debt. In my practice helping taxpayers for over 15 years, I’ve seen well-prepared financial statements turn borderline cases into accepted offers, and sloppiness turn promising cases into automatic rejections.

Why the financial statement matters

The IRS uses the information you provide to calculate two key things:

  • Reasonably Collectible Equity (RCE): What the IRS believes they could obtain by liquidating your assets. This considers equity after allowable exemptions and required selling costs.
  • Reasonably Collectible Income (RCI): The income available after allowable living expenses (IRS national and local standards plus documented necessary expenses).

If the combined RCE and the present value of RCI are less than your tax liability, an OIC may be approved. The forms you’ll typically use are Form 656 (the Offer in Compromise) and the collection information statements (Form 433‑A(OIC) for individuals and Form 433‑B(OIC) for businesses) (see IRS: Offer in Compromise and forms at https://www.irs.gov/individuals/offer-in-compromise).

How the IRS evaluates your Financial Statement

  • Complete disclosure: The IRS expects full disclosure of wages, bank accounts, retirement accounts, real estate, vehicles, business assets, and debts. Omissions — even unintentional — often lead to denial or later reopening.
  • Asset valuation rules: The IRS applies specific methods to value assets (equity after secured debt, expected sale costs, and allowable exclusions such as basic household goods). Follow the instructions on the OIC collection forms.
  • Living expense standards: The IRS will use national and local standards for many living expenses, but it also considers documented, necessary expenses that exceed those standards (medical, childcare, disability-related costs).
  • Ongoing collectibility: The IRS looks at both current ability to pay and future collectibility over a reasonable period.

Practical steps to maximize acceptance

1) Start with accuracy and full documentation

  • Use current bank statements, pay stubs, statements for investment and retirement accounts, mortgage statements, and vehicle loans. Incomplete or vague documentation is the most common reason for delays or denials. (IRS instructions for Form 656 and the 433 series: https://www.irs.gov/)
  • In my experience, submitting a complete set of three months of bank statements and two most recent pay stubs reduces follow-up requests significantly.

2) Choose the right forms and versions

  • Use Form 656 for the offer itself and the correct collection information statement: Form 433‑A(OIC) for individuals and Form 433‑B(OIC) for businesses. Do not mix the generic 433‑F unless specifically instructed — the OIC‑specific 433 series collects different details. (See IRS forms: https://www.irs.gov/forms-pubs)

3) Understand lump-sum vs. periodic offers and the payment rules

  • Lump-sum (cash) offers: Typically require 20% of the offer to be included with the application and the remainder paid in five or fewer payments once accepted.
  • Periodic payment offers: Require the first proposed installment with the application and continued payments while the offer is pending.
  • There is an application fee (check current IRS guidance — historically $205) but it may be waived for low-income applicants. Always confirm current fee rules on the IRS OIC page cited above.

4) Use IRS standards but document exceptions

  • The IRS applies national and local standards for many expense line items. If you have legitimate, necessary expenses above those standards (for example, large medical bills, required work-related expenses, or disability-related costs), document them clearly and show why they’re unavoidable.

5) Value assets realistically

  • Don’t overstate or understate asset values. Overstating can make your case look weak; understating can be construed as bad faith. For real estate, provide recent appraisals or comparable sales if possible. For vehicles, use NADA or Kelley Blue Book values and show loan balances and repossession costs if relevant.

6) Prepare a concise cover letter

  • Summarize the key facts: why the taxpayer cannot pay, the offer amount and type, and a brief explanation of any unusual expenses or assets. A clear cover letter helps the IRS reviewer focus on the right items quickly.

Common mistakes to avoid

  • Omitting income or accounts. Even small hidden income sources can lead to investigation and denial.
  • Submitting stale or inconsistent documentation. Currency matters: recent bank statements and paystubs are essential.
  • Relying on too-low offers. If your offer is significantly below what the IRS can reasonably collect (based on RCE and RCI), it’s likely to be rejected.
  • Ignoring the application fee and payment rules. Failure to include required payments will delay processing or cause outright rejection.

What to include: a practical checklist

  • Form 656 (completed and signed).
  • The correct Form 433 series: 433‑A(OIC) or 433‑B(OIC), completed and signed.
  • The required application fee or evidence of a fee waiver request.
  • Initial payment (20% for lump-sum or first installment for periodic offers) if applicable.
  • Recent bank statements (usually last 2–3 months).
  • Pay stubs covering recent periods and year‑to‑date income documentation.
  • Mortgage/lease statements, vehicle loan statements, credit card statements.
  • Proof of medical expenses, childcare costs, or other documented necessary expenses that exceed IRS standards.
  • Valuation documents: appraisals, vehicle valuations, recent brokerage statements.

Timeline and follow-up expectations

Processing times vary. Historically, OIC reviews commonly take 6–12 months, but busy periods or requests for additional documentation can extend that timeline. During review, the IRS may request clarifications — respond quickly and with documentation. Keep copies of everything you submit. (See IRS timeline notes at https://www.irs.gov/individuals/offer-in-compromise)

If your OIC is denied

  • You can appeal a denial through the Collection Appeals Program (CAP) or by filing a new offer if your financial circumstances have changed. Consult an experienced tax professional — in my experience, timely appeals that focus on missing facts or valuation errors can reverse initial denials.
  • See our guide on next steps after a denial for practical strategies and timelines: When an Offer in Compromise is Denied: Appeals and Alternatives (https://finhelp.io/glossary/next-steps-after-an-offer-in-compromise-denial-appeals-and-alternatives/).

When to consider alternatives

An OIC is not always the best route. Alternatives include an installment agreement or bankrutpcy in specific circumstances. Use our comparison guides to decide which fits your situation: Choosing Between an Installment Agreement and Offer in Compromise (https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-offer-in-compromise/) and Options When the IRS Rejects Your Offer in Compromise (https://finhelp.io/glossary/options-when-the-irs-rejects-your-offer-in-compromise/).

Real-world example (brief)

A small business client facing penalties accumulated from unpaid payroll taxes had modest equity in one commercial vehicle and irregular cash flow. By documenting business cash flow, providing a recent vehicle appraisal, and demonstrating necessary future operating expenses, we structured a periodic offer the IRS accepted. The business avoided closure and maintained payroll while completing the payment plan under the OIC terms.

Final checklist before you file

  • Double-check that all numbers match across forms and supporting statements.
  • Include required payments and fee or a credible fee waiver request.
  • Add a short explanatory cover letter that highlights the reasons behind any nonstandard expenses.
  • Make copies and submit via certified mail or the method the IRS currently accepts; track delivery.

Professional disclaimer

This article is educational and does not substitute for personalized tax advice. Offer in Compromise rules and fees change; always verify current procedures with the IRS and consult a qualified tax professional for advice specific to your situation. See IRS Offer in Compromise resources for official guidance: https://www.irs.gov/individuals/offer-in-compromise.

Sources and further reading

If you want, provide your specific timeline, asset list, and recent proof-of-income and I can outline the likely RCE/RCI the IRS would calculate (this is educational guidance, not formal representation).