Quick overview

A realistic Offer in Compromise (OIC) shows the IRS what you can reasonably pay now or over time. The IRS compares your collectible equity in assets plus your reasonable monthly net income against the tax debt. Submitting accurate income and expense figures with supporting documents and the correct forms improves your chance of acceptance (IRS, 2025).

Step-by-step preparation

  1. Gather current tax compliance and proof of filing. The IRS requires you to be current on filings and estimated tax payments where applicable.
  2. Choose the correct forms: Form 656 (Offer in Compromise) and Form 433‑A (OIC) for individuals or Form 433‑B (OIC) for businesses. Review the Offer in Compromise booklet (Form 656‑B) for instructions (IRS: Form 656, Form 433‑A/433‑B, Form 656‑B).
  3. Calculate gross monthly household income: wages, self‑employment income, rental income, investment income, benefits, and regular transfers. Use recent pay stubs, profit/loss statements, and bank statements.
  4. Determine allowable expenses: apply IRS Collection Financial Standards (national and local standards) for food, housing, transportation, etc., and document additional reasonable expenses not covered by standards.
  5. Value assets and equity: check account balances, retirement account cash values (not usually penalized for projected future retirement needs), real estate equity, and vehicle equity.
  6. Run the IRS ability‑to‑pay calculation: collectible equity + 12 months of net monthly disposable income (for lump‑sum offers) or 24+ months for periodic offers—confirm current guidance in Form 656 instructions.

How the IRS evaluates income and expenses

The IRS uses provided financial statements plus its Collection Financial Standards to determine reasonable living expenses (IRS Collection Financial Standards, 2025). Items commonly adjusted or scrutinized:

  • Household vs. personal income attribution
  • Nonessential or discretionary spending
  • Unverifiable claimed expenses (must be supported by receipts or contracts)

Submitting documented, conservative numbers helps. Overstated expenses or missing proofs are frequent reasons for rejection.

Documentation checklist

  • Signed Form 656 (Offer in Compromise) and the correct collection information statement: Form 433‑A (OIC) or 433‑B (OIC)
  • Government IDs and Social Security numbers for household members
  • Recent federal tax returns (generally last 2–3 years) and proof of filing
  • Recent pay stubs or profit/loss statements
  • Bank statements (3–6 months)
  • Lease/mortgage statements, utility bills, and insurance declarations
  • Receipts or invoices for recurring expenses (medical, childcare, disability‑related costs)
  • Asset documentation: vehicle titles, real estate appraisals or statements, retirement account statements
  • Proof of extraordinary circumstances (job loss, divorce, medical emergencies)

For a compact application checklist and common pitfalls, see our internal Offer in Compromise Application Checklist: Documents and Common Pitfalls.

Common mistakes to avoid

  • Submitting incomplete or inconsistent documentation
  • Using outdated forms or ignoring Form 656 instructions
  • Overrelying on projected income increases without current proof
  • Forgetting to account for collectible equity in assets

Practical example (brief)

A self‑employed client with $60,000 tax liability showed monthly net household income of $1,600 after allowable expenses and had $4,000 in bank equity. Using the IRS approach, we calculated collectible equity + 12 months of disposable income to arrive at an offer the client could afford and the IRS accepted after review. Documenting reduced hours, recent profit/loss statements, and bank withdrawals strengthened the case.

What to expect: timeline, fees, and offer types

  • Processing time: commonly 6–12 months but can vary; respond quickly to IRS requests.
  • Application fee: the IRS may require a nonrefundable user fee unless you qualify for a low‑income waiver—check the current Form 656 instructions.
  • Offer options: lump‑sum cash offer (reduced payment now) or periodic payment offer (pay over time); the IRS evaluates which fits your ability to pay.

When to get professional help

Complex asset valuations, business tax debt, or appeals after rejection benefit from a CPA, enrolled agent, or tax attorney. In my experience guiding clients through OICs, early documentation and realistic calculations materially improve outcomes.

Related resources on FinHelp

Authoritative sources

Disclaimer: This article is educational and not individualized tax advice. Rules and forms change; consult a qualified tax professional or the IRS website for guidance specific to your situation.