Why this checklist matters

Submitting a complete, accurate Offer in Compromise (OIC) application is the single biggest factor that affects whether the IRS accepts your settlement offer. Incomplete forms, missing proofs of income, or incorrect payment handling are the most common reasons the IRS delays or denies offers. This checklist focuses on the paperwork, payments, and process steps that matter most and highlights professional tips to avoid common pitfalls.

(Author note: In my 15+ years as a CPA I’ve seen OIC approvals hinge on small documentation items — a missing recent bank statement or an unreported side gig can make the difference.)

Sources: IRS Offer in Compromise overview and instructions (see: https://www.irs.gov/individuals/offer-in-compromise).

Quick, practical OIC checklist (at-a-glance)

  • Completed Form 656 (Offer in Compromise).
  • Completed Collection Information Statement: Form 433-A(OIC) for individuals or Form 433-B(OIC) for businesses.
  • Proof of income: recent pay stubs (last 3 months), Social Security statements, proof of self-employment receipts.
  • Bank statements: last 3–6 months for all accounts.
  • Proof of recurring expenses: mortgage or rental statements, utilities, insurance, child support.
  • Asset documentation: titles, vehicle valuations, appraisal reports, retirement statements, real estate valuations.
  • Recent tax returns: typically the last three years of filed returns.
  • Required payment with the offer (see payment options below).
  • Signed power of attorney (Form 2848) or authorization (Form 8821) if a representative files for you.
  • Application fee (currently $205 unless you qualify for a low-income exception). See IRS guidance for current fee rules.

Required IRS forms and where to get them

  • Form 656, Offer in Compromise — the official application.
  • Form 433-A(OIC) — Collection Information Statement for wage-earners, self-employed individuals or others not filing as businesses.
  • Form 433-B(OIC) — Collection Information Statement for businesses.
  • Form 2848 — Power of Attorney (if you hire a tax professional to represent you).

All forms and detailed instructions are available on the IRS website: https://www.irs.gov/individuals/offer-in-compromise and on the standard IRS Forms & Publications pages. Follow the current form instructions closely; the IRS updates requirements and worksheets from time to time.

Payments: what the IRS expects (lump-sum vs. periodic)

The IRS requires a payment with your offer and different payment rules apply depending on the type of offer you choose.

  • Lump-sum (cash) offer: Typically you must submit an initial payment (the IRS generally asks for 20% of the offer amount) with Form 656 and then submit the remaining balance in monthly payments while the IRS reviews the offer. If the offer is accepted, the remainder is paid according to the terms you proposed. If the offer is rejected, the IRS will normally return the funds minus a processing fee if applicable. Always confirm the required amounts on the current IRS OIC instructions.

  • Periodic payment offer: You submit the first proposed monthly payment with the application and continue to make those monthly payments while the IRS considers your offer. If you stop making required payments during the review, the IRS may return your offer as unprocessable.

Note: Low‑income taxpayers may qualify for a waiver of the $205 application fee and reduced payment requirements. Check the IRS guidance on low-income exceptions before submitting.

(Reference: IRS Offer in Compromise overview and Form 656 instructions.)

Document collection: exact items to assemble

Gather the following items before you start completing forms to reduce errors and rework.

Identification and compliance

  • Government-issued photo ID (driver’s license, state ID, passport).
  • Proof that you are current with filing requirements (copies of recent returns or IRS transcripts).

Income documentation

  • Pay stubs for the last 3 months.
  • Year-to-date income statements and last year’s W-2s or 1099s.
  • Profit & loss statements and business bank statements for self-employed taxpayers.
  • Social Security award letters or unemployment statements, if applicable.

Asset documentation

  • Bank statements (checking, savings, money market) — last 3–6 months.
  • Title and registration for vehicles; valuation using NADA or Kelley Blue Book where required.
  • Mortgage statements, property tax bills, and recent appraisal or broker price opinion for real estate.
  • Retirement account statements (401(k), IRAs) and loan documentation.

Expense documentation

  • Lease agreements, mortgage payment history, homeowner association (HOA) dues.
  • Utility bills (last 3 months), insurance premiums, medical expenses, child support payments.
  • Receipts for ongoing essential expenses (prescription meds, childcare, transit costs).

Other

  • Copies of notices or liens from the IRS.
  • Proof of special circumstances (medical bills, loss of income, natural disaster recovery documents).

Common pitfalls and how to avoid them

  1. Incomplete or inconsistent numbers: Use bank statements and pay stubs to back every figure on Form 433-A/B. The IRS verifies reported assets and income — discrepancies slow or kill an offer.

  2. Forgetting side income: Freelance, gig, rental or investment income must be reported. Missed income discovered later can be treated as fraud and result in penalties.

  3. Missing the required payment: If you don’t include the initial required payment (or fail to make ongoing payments), the IRS may return your offer unprocessed.

  4. Not staying compliant on filings and estimated taxes: You must be current with filing and estimated tax obligations. If you fall out of compliance during review, your offer may be jeopardized.

  5. Undervaluing assets: Underestimating the value of property or retirement accounts creates credibility problems. Use industry-standard valuations and include appraisals where required.

  6. Ignoring IRS communications: Respond promptly to requests for additional documentation or clarifications. Long delays can cause the IRS to reject or return the offer.

  7. Submitting weak supporting evidence for hardships: Provide clear proof for medical, employment, or disaster-related hardships — bills, provider letters, or employer notices.

Timeline and what to expect

  • IRS review times vary by case complexity. Many OICs are resolved within 6–12 months; complex cases can take longer.
  • During review, the IRS may request additional documents or arrange a telephone interview.
  • If rejected, you have appeal rights (Collection Appeal Program or Tax Court options depending on the situation). Review the IRS denial letter closely and follow the appeal deadlines.

(See IRS OIC pages for timelines and appeals guidance.)

When to consult a tax professional

Hire a qualified tax professional if:

  • Your case includes business assets, multiple tax years, or bankruptcy interactions.
  • You can’t document income or expenses easily, or there are valuation disputes for property.
  • You want representation during negotiations or the appeals process (Form 2848 power of attorney allows representation).

In my practice, working through potential valuation disputes and organizing the Collection Information Statement (Form 433) upfront reduces review time and improves acceptance odds.

Related reading on FinHelp.io: “Preparing the Financial Statement for an Offer in Compromise” and “Offer in Compromise Eligibility for Self-Employed Taxpayers.” These pages explain the Collection Information Statement and self-employed documentation in depth:

Also relevant: “How the IRS Calculates Your Payment Amount in Offers in Compromise”: https://finhelp.io/glossary/how-the-irs-calculates-your-payment-amount-in-offers-in-compromise/

Practical filing checklist (step-by-step)

  1. Gather all documents listed in the “Document collection” section.
  2. Confirm you have paid or are current with required tax filings.
  3. Complete Form 433-A(OIC) or 433-B(OIC) and attach supporting statements.
  4. Complete Form 656 and prepare the required payment (initial payment or first installment).
  5. Include the application fee or verify a low-income waiver applies.
  6. Sign, date, and submit per the Form 656 mailing instructions — keep copies of everything.
  7. Respond quickly to IRS requests during the review.

Final professional tips

  • Double-check every numeric entry against bank statements and pay stubs.
  • Include a short cover letter summarizing your hardship and the rationale for the offer amount.
  • Be conservative when estimating unavoidable monthly expenses — the IRS scrutinizes discretionary spending.
  • Use certified appraisals for high-value assets to avoid valuation disputes.

Disclaimer

This article is educational and does not constitute professional tax advice. Rules, fees, and payment procedures for Offers in Compromise change periodically. Consult the IRS OIC pages and a qualified tax professional for advice tailored to your situation.

Authoritative sources