Why this matters

The IRS won’t accept an Offer in Compromise (OIC) without a complete, well‑documented financial statement. The statement shows the IRS whether you can pay the full tax debt now or over time and helps determine the Reasonably Collectible Amount (RCP). In my 15 years advising taxpayers, I’ve seen precise, well‑supported statements shorten processing times and materially improve negotiation outcomes.

Required forms and core documents

  • Complete the correct forms: Form 656 (Offer in Compromise) plus the appropriate Collection Information Statement—Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses. See the IRS OIC overview for current form details IRS Offer in Compromise.
  • Supporting documentation: recent pay stubs, two years of tax returns, bank statements (3–6 months), recent statements for retirement and investment accounts, vehicle titles/loan statements, mortgage statements, proof of unusual expenses (medical bills, child care), and proof of monthly bills.

How the IRS evaluates your financial statement

  1. Asset equity: The IRS looks at the net realizable equity in assets (fair market value minus secured debt). Document vehicle values, home equity, retirement balances, and investment accounts. For guidance on allowable asset valuation and collection standards, see the IRS Collection Financial Standards Collection Financial Standards.

  2. Disposable income: The IRS subtracts allowable living expenses (using national and local standards) from monthly income to determine disposable income that could be used to pay taxes.

  3. Reasonably Collectible Amount (RCP): RCP = net realizable equity in assets + projected future income (monthly disposable income × collection period). The IRS compares the RCP to the tax liability to decide if an offer is acceptable.

Step‑by‑step checklist to prepare the statement

  1. Gather documents: recent pay stubs, last two federal returns, bank statements, mortgage and auto loans, investment and retirement account statements, proof of uninsured medical expenses, and documentation of dependents.
  2. Complete the correct collection statement: use Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses. Attach Form 656 (Offer in Compromise).
  3. Value assets carefully: state fair market value and outstanding loans, and include sale costs (real estate commission, repair costs) when relevant.
  4. Itemize income and expenses: list gross income sources, then apply IRS national/local standards for categories like food, clothing, and transportation; add documented non‑standard expenses where justified.
  5. Double‑check math and add supporting documents: missing or inconsistent documentation is the most common cause of delays and rejections.

Common mistakes to avoid

  • Under‑documenting assets (no recent statements or valuations).
  • Claiming non‑allowable expenses or failing to use IRS Collection Standards.
  • Forgetting to report all income sources (side gigs, rental income, unemployment, stimulus payments if relevant).
  • Submitting incomplete forms or failing to sign Form 656.

Practical tips from practice

  • Be conservative with asset values and realistic about monthly income. The IRS will verify values and search for unreported income.
  • Separate necessary living expenses from discretionary spending. The IRS uses allowable standards; overstating discretionary expenses weakens credibility.
  • If cash flow is tight but equity exists in assets, consider whether selling or liquidating a portion of assets is a better path than an OIC.
  • Low‑income taxpayers may qualify for a fee waiver and simplified processing—check the IRS guidance before submitting.

Timeline and next steps

Processing typically takes 6–12 months depending on complexity and whether the IRS asks for more documentation. If rejected, you can request reconsideration or appeal. See related steps in our guides: Preparing a Realistic Offer in Compromise: Income, Expenses, and Supporting Docs and Offer in Compromise: How Asset Valuation Affects Your Settlement.

When to get professional help

If you’re unsure about asset valuation, reporting income from self‑employment, or documenting unusual expenses, consult a tax professional or enrolled agent. In my practice, clients who bring organized documentation and a clear explanation of special circumstances get faster, more favorable results.

Authoritative sources

Professional disclaimer

This article is educational and does not constitute tax or legal advice. For personalized guidance, consult a qualified tax professional, CPA, or enrolled agent who can review your documents and advise based on current IRS rules.