Why documentation matters

The IRS uses your supporting documents to verify the numbers on your OIC forms and to determine whether you meet the “doubt as to collectibility” or effective inability-to-pay standard. Poor or missing records lengthen processing times and reduce the chance of acceptance. (See IRS Offer in Compromise guidance for forms and procedures.)

Key documents to collect (checklist)

  • Completed Form 656, Offer in Compromise (signed). See the official instructions for filing and payment rules.
  • Collection Information Statement: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses; some taxpayers use Form 433-F for simplified reporting.
  • Federal tax returns for the last three years.
  • Recent pay stubs (typically 60 days) and proof of year-to-date income.
  • Bank statements (usually 3 months; more if irregular cash flow).
  • Documentation of monthly living expenses: rent/mortgage, utilities, food, transportation, insurance, child care, medical expenses, and court-ordered payments.
  • Asset documentation: current statements for checking/savings, retirement account balances, brokerage accounts; vehicle valuations (NADA or Kelley Blue Book and titles); real estate records (county value, mortgage statements, appraisals) and equity calculations.
  • Business records (if self-employed): profit & loss statements, balance sheets, recent business bank statements, and tax deposits.
  • Proof of extraordinary or one-time liabilities: medical bills, recent large uninsured losses, casualty losses, or legal judgments.
  • Copies of correspondence with IRS (filing notices, CP letters) and any prior installment agreements or levy releases.

Tip: Keep original documents and submit copies. Organize your packet with a cover letter and table of contents for faster IRS review.

How the IRS evaluates your packet

The IRS compares reported income and allowable expenses, plus realizable equity in assets, to compute a reasonable collection potential (RCP). If your offer equals or exceeds the RCP, acceptance is unlikely. Be prepared to explain non-essential assets and why liquidation would not be feasible without undue hardship.

Practical note from practice: when I prepare packets for clients, a clear net household income reconciliation and labeled attachments cut follow-up requests dramatically.

Common documentation mistakes to avoid

  • Submitting incomplete or unsigned forms (Form 656 must be signed).
  • Using inflated or rounded-down expense figures without receipts.
  • Failing to show consistent timelines (e.g., monthly expenses mismatching bank statements).
  • Omitting business liabilities or recent transfers between accounts.

For a deeper dive into frequent errors, review this guide on submitting an OIC and documentation mistakes: Submitting an Offer in Compromise: Common Documentation Mistakes (internal link).

Real-world examples (short)

  • Medical hardship: A taxpayer supported a low offer with itemized medical invoices, provider statements and a statement of monthly unpaid medical obligations; the documentation convinced the IRS the debt was uncollectible.
  • Small business: An owner supplied current P&L, bank reconciliations and a cash-flow forecast showing insufficient free cash to pay the tax liability; the IRS accepted a reduced periodic-payment offer after reviewing those documents.

Special considerations

  • Application fee and initial payment: The OIC application fee (currently $205; may be waived under low-income certification) and the required initial payment differ by offer type—lump-sum offers generally require 20% of the offer up front, while periodic offers include the first proposed payment. Confirm current amounts on the IRS OIC page before submitting.
  • Low-income taxpayers: If you qualify under the IRS’ low-income certification, you may have the fee and initial payment waived—document eligibility carefully.
  • Bankruptcy and OIC: Bankruptcy schedules can be useful evidence of inability to pay but consult a tax attorney before using bankruptcy documents as your primary justification.

How to present your packet for better results

  1. Start with a one-page summary: taxpayer name, SSN, tax periods covered, total tax owed, offered amount, and short reason for the offer (e.g., medical hardship, job loss).
  2. Include an itemized table of contents and tabbed sections matching your forms.
  3. Label supporting documents clearly (e.g., “Bank Statements — Jan–Mar 2025”).
  4. Reconcile totals on forms to your supporting schedules (don’t force the reviewer to add multiple columns).

Useful IRS and site resources

Internal resources on finhelp.io:

Frequently asked questions

  • How long will the IRS take to decide? Processing often takes several months; complex cases or current IRS backlogs can extend review to a year or more. Check status and contact your assigned examiner if delays occur.
  • Will the IRS stop collections while reviewing my offer? If you submit a complete offer and include required payments, the IRS generally pauses most collection actions while they evaluate the offer, but levies or liens already in place may require additional steps to release.
  • Can I update my offer if my finances change? Yes — you must notify the IRS immediately of material changes. If your income increases, the IRS can reopen the evaluation.

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Requirements and fees change; verify current rules with the IRS or a qualified tax resolution professional for personalized guidance.

Authoritative sources

(Information reviewed against IRS guidance current as of 2025.)