Why documentation matters

The IRS evaluates OICs by comparing a taxpayer’s reasonable collection potential (RCP) to the offer amount. Clear, verifiable paperwork proves your income, monthly living costs, and the value (and equity) of assets—so your offer accurately reflects what you can pay. Good documentation shortens processing time and reduces the risk of rejection for incomplete submissions (IRS, Offer in Compromise).

Key documents to prepare (what, why, and how much to gather)

  • Income proof

  • What: Recent pay stubs, W-2s, 1099s, year-to-date income statements, and profit & loss (P&L) statements for self-employed taxpayers.

  • Why: Shows current earning capacity and income volatility.

  • How much: Last 3–6 months of pay stubs and P&L covering the last 12 months when available.

  • Tax returns

  • What: Federal tax returns (Form 1040) and schedules for the last 2–3 years.

  • Why: Confirms reported income, deductions, and prior tax history.

  • Bank and investment statements

  • What: Checking/savings, 401(k), brokerage, and other account statements.

  • Why: Verifies cash on hand, recent deposits, and liquid investments.

  • How much: 3–6 months of statements; year-end summaries for retirement/investment accounts.

  • Asset documentation

  • What: Mortgage statements, property deeds, vehicle titles and payoff amounts, appraisals, and recent valuations for business assets.

  • Why: The IRS calculates equity after allowable liens and encumbrances to determine collectible value.

  • Monthly expense records

  • What: A detailed list of household expenses—rent/mortgage, utilities, insurance, medical bills, child care, transportation, and documented extraordinary costs.

  • Why: Shows allowable living expenses that reduce monthly disposable income.

  • Tip: Use receipts, billing statements, and canceled checks to substantiate larger or irregular expenses.

  • Proof of dependents and special circumstances

  • What: Court orders, custody agreements, proof of disability, medical bills, or unemployment documentation.

  • Why: Helps justify allowance for nonstandard living costs or temporary inability to pay.

  • Business records (if self-employed)

  • What: P&L, balance sheet, business bank statements, invoices, and tax deposits.

  • Why: Demonstrates net cash flow available to pay tax liabilities.

  • Identity and legal documents

  • What: Photo ID, Social Security card, power of attorney (if using a representative).

  • Why: Required to process the application and to allow tax professionals to represent you.

Forms you will submit

  • Form 656 (Offer in Compromise): The formal offer and election of terms (lump-sum vs periodic). See the IRS overview for filing options.
  • Collection information statement: Typically Form 433‑A(OIC) for individuals or Form 433‑B(OIC) for businesses; these provide the IRS the detailed financial snapshot used to compute RCP.

(For more on forms, filing fees, and online filing options, see our guide: Filing an Offer in Compromise Online: Forms, Fees, and Supporting Documentation.)

How to assemble documentation effectively

  1. Start with a checklist: Match each required field on Form 433 to supporting documents.
  2. Organize by category: Income, assets, expenses, and supporting legal documents. Use clear labels and date ranges.
  3. Create a summary sheet: One-page financial snapshot (monthly income, allowable expenses, liquid assets, equity in nonexempt assets) helps the IRS reviewer quickly assess your case.
  4. Explain anomalies: Add brief cover notes for gaps, seasonal income, or one-time expenses (medical crisis, recent job loss) and include supporting records.
  5. Keep originals and submit copies: Keep originals for your records and submit legible, dated copies unless the IRS requests originals.

Common documentation mistakes and how to avoid them

  • Incomplete or inconsistent records: Ensure dates and figures match across pay stubs, bank statements, and tax returns.
  • Underreporting expenses without receipts: If you claim high recurring medical or childcare costs, provide bills or court orders.
  • Using stale valuations: Supply recent appraisals or market-comparable evidence for real estate and business assets.

(See our coverage of common application pitfalls for more examples: Submitting an Offer in Compromise: Common Documentation Mistakes.)

Checklist: Documents to include (quick reference)

  • Photo ID and Social Security number
  • Last 2–3 years of federal tax returns
  • Last 3–6 months of pay stubs / year-to-date income evidence
  • Business P&L and bank statements (if applicable)
  • 3–6 months of personal bank statements
  • Mortgage statements, vehicle titles, loan payoff letters
  • Recent appraisals or market valuations
  • Utility bills, medical bills, childcare receipts
  • Proof of dependents, unemployment, or disability
  • Form 656 and the appropriate Form 433 collection statement

When to get professional help

In my practice (15 years assisting over 500 taxpayers), the most successful OICs are those prepared with professional review when cases involve:

  • Complex business income or rapidly changing cash flow
  • Multiple properties or disputed asset valuations
  • Large, unusual medical or family-related expenses

A qualified tax professional or low-income taxpayer clinic can review your documentation for completeness and help estimate a realistic offer. If you authorize a representative, include Form 2848 (Power of Attorney) with your submission.

Authorities and further reading

Internal FinHelp resources

Professional disclaimer

This article is educational and does not replace personalized tax advice. Rules and forms change; confirm current requirements with the IRS or a licensed tax professional before filing an Offer in Compromise.