Preparing a Financial Disclosure Package for an Offer in Compromise

Why the financial disclosure package matters

The IRS bases most Offers in Compromise on a taxpayer’s ability to pay, which it determines by reviewing a complete financial disclosure package. An accurate, well-documented package demonstrates your true financial condition, supports the offer amount you propose, and prevents delays or denials due to missing or inconsistent information (IRS OIC overview: https://www.irs.gov/individuals/understanding-offer-in-compromise).

In my practice helping taxpayers prepare OICs, I’ve seen two common outcomes: acceptance when documentation is clear and complete, or denial when the IRS finds unreported income, undisclosed assets, or unsupported living expenses. Because the IRS may verify items independently, treat the disclosure package as evidence, not a negotiation tactic.

Core documents to include (checklist)

• Completed IRS Form 656 (Offer in Compromise) and any required signatures (see Form 656: https://www.irs.gov/forms-pubs/about-form-656).
• The appropriate Collection Information Statement: Form 433-A (OIC) for individuals and Form 433-B (OIC) for businesses. These detail income, expenses, assets, and liabilities.
• The Offer in Compromise Booklet (Publication 5 / Form 656-B guidance PDF) or the IRS OIC instructions to ensure you follow formatting and documentation rules (https://www.irs.gov/pub/irs-pdf/f656b.pdf).
• Recent federal tax returns (typically 3 years), W-2s, and 1099s.
• Recent pay stubs or profit-and-loss statements for self-employed taxpayers (at least 3 months).
• Bank statements (3–6 months) for all accounts, including checking, savings, and investment accounts.
• Documentation of monthly living expenses: receipts, leases, child-care bills, court-ordered support, and utility bills.
• Statements for retirement accounts, brokerage accounts, vehicle titles, mortgage statements, and current loan balances.
• Statements for outstanding debts and secured obligations (credit cards, medical bills, student loans).
• Proof of special circumstances: medical records, bankruptcy filings, loss of income documentation, or proof of recent major expenses.

Always include original or clearly legible copies and attach a simple index at the front listing every document.

How the IRS evaluates the package

The IRS compares the assets and future income available to pay against the total tax liability. They use national and local expense allowances and allowable living expenses (worksheet values are in the Form 433 series and IRS instructions). The most common IRS decision paths are:

• Accept the offer if the amount offered reasonably exceeds what the IRS believes it can collect through enforced collection.
• Return the offer if the file is incomplete or inaccurate.
• Deny the offer if the IRS determines the taxpayer can fully pay the amount or the offer is otherwise unsuitable.

Note: The IRS may require valuation of non-cash assets (e.g., second homes, investment property, or valuable personal property). Provide recent appraisals or market listings when valuation is not obvious.

Organizing and presenting the package (practical steps)

1. Start with a signed Form 656 and a one-page cover letter summarizing the taxpayer’s situation and requested offer amount.
2. Attach a table of contents and number each supporting document. Use tabs or a single PDF with bookmarks for digital filing.
3. Group documents under headings that mirror Form 433 (Income, Expenses, Assets, Debts). This makes the IRS reviewer’s job easier and reduces follow-up questions.
4. For self-employed taxpayers, include a year-to-date profit-and-loss and an explanation of any seasonal fluctuations.
5. Create a short explanatory memo for any large, unusual, or non-recurring expenses (medical bills, casualty losses, divorce costs) and attach supporting bills or statements.

Valuing and reporting retirement accounts and exempt assets

Many taxpayers mistakenly omit retirement accounts thinking they’re untouchable. The IRS will include most retirement and investment accounts in its collectibility analysis, though it may allow certain claims for hardship or limited access. Provide account statements and explain any restrictions or early-withdrawal penalties. If assets are encumbered (e.g., home equity with a mortgage), include payoff statements.

Common mistakes to avoid

• Omitting income sources: side gigs, rental income, or spousal support.
• Treating retirement accounts as automatically exempt.
• Providing vague or undocumented expense claims; the IRS expects proof.
• Submitting unsigned forms or missing required pages from Form 433.
• Failing to update the IRS if your financial circumstances change during processing.

For more detail on mistakes and how to avoid them, see our guide Avoiding Common Mistakes on an Offer in Compromise Application (internal link: https://finhelp.io/glossary/avoiding-common-mistakes-on-an-offer-in-compromise-application/).

What to include for special situations

• Business owners: provide balanced financial statements, business bank statements, and current tax deposits history. Include evidence if removing business assets would create hardship or eliminate the business’ earning capacity.
• Recent unemployment or medical hardship: include termination letters, unemployment benefit statements, medical bills, and physician statements.
• Bankruptcy or pending litigation: include court documents and schedules.

If you need a step-by-step build of the financial package, our companion article How to Build a Financial Package for an Offer in Compromise explains assembly and formatting tips (internal link: https://finhelp.io/glossary/how-to-build-a-financial-package-for-an-offer-in-compromise/).

Timing, fees, and processing notes

Processing times vary; simple cases may resolve in a few months, while complex files can take 6–12 months or longer. The IRS generally requires an application fee and an initial payment when you submit your offer, though low-income taxpayers may qualify for relief or a waiver—check the IRS OIC page for current fee rules (https://www.irs.gov/individuals/understanding-offer-in-compromise).

During review, the IRS may request additional documentation or conduct verifications. Prompt responses to requests reduce delays. If circumstances change while the offer is pending (new income, sale of an asset), notify the IRS immediately; failing to do so may invalidate the offer.

After submission: likely outcomes and next steps

• Acceptance: You’ll receive a written acceptance notice with payment terms. Full compliance with payment and filing requirements for the next five years is typically required.
• Rejection: The IRS will explain reasons. You may appeal the decision or reapply with corrected or updated information. See our guide Rebuilding After an Offer in Compromise Denial for next steps (internal link: https://finhelp.io/glossary/rebuilding-after-an-offer-in-an-compromise-denial/).
• Return for more information: Respond quickly with requested documents.

Practical professional tips

• Keep all tax filings current. The IRS will normally not accept an OIC if required returns are unfiled.
• Use conservative valuations and avoid guessing. If you claim an asset has no market value, provide evidence.
• Keep a record of every document you send and use tracked mail or secure electronic submission.
• Consider qualified representation. An experienced tax practitioner (CPA, enrolled agent, or tax attorney) can prevent common errors and help you present the best possible package.

Example checklist (one-page to include with package)

• Signed Form 656
• Signed Form 433-A(OIC) or Form 433-B(OIC)
• Table of Contents / Index
• Last 3 years’ tax returns
• Last 3 months’ pay stubs / P&L statements
• 3–6 months bank statements
• Current statements for all loans and credit cards
• Proof of necessary monthly expenses (rent/mortgage, utilities, insurance)
• Documentation of medical or other extraordinary expenses
• Asset statements and titles
• Explanatory memos for unusual items

Frequently asked practical questions (brief)

• Can I negotiate the offer amount? The IRS evaluates the offer against its collection potential; you can explain hardships, but the agency’s valuation methods guide the ultimate decision.
• Should I wait to apply if I anticipate income changes? If a significant change is likely soon, it may be worth documenting and including it; do not delay filing if the current situation justifies an offer.

Sources and additional reading

• IRS, Understanding Offer in Compromise: https://www.irs.gov/individuals/understanding-offer-in-compromise
• IRS, Form 656 (Offer in Compromise): https://www.irs.gov/forms-pubs/about-form-656
• IRS, Offer in Compromise instructions & booklet (Form 656-B guidance): https://www.irs.gov/pub/irs-pdf/f656b.pdf

Disclaimer

This article is educational and does not constitute legal, tax, or accounting advice. Rules and processing practices change; consult a qualified tax professional for guidance specific to your case.