Why the financial statement matters

The financial statement is the core of any Offer in Compromise (OIC). It doesn’t just show numbers — it tells the IRS whether you truly cannot pay the tax debt and, if so, how much you can reasonably be expected to pay now or in the future. The IRS uses your statement to calculate your Reasonably Collectible Equity (RCE), compare that to your offer amount, and determine collectibility (IRS, Offer in Compromise). Accurate, well-documented statements shorten review time and increase the chance of acceptance.

Sources: IRS Offer in Compromise program and Form instructions (see: https://www.irs.gov/individuals/offer-in-compromise and Form 656 instructions).

Step-by-step: assembling the financial statement

  1. Pick the correct forms and understand the required attachments
  • Individuals: Form 656 (Offer in Compromise) plus Form 433-A (OIC) (Collection Information Statement). Businesses use Form 433-B (OIC). Include all schedules and signatures. (See IRS Form 656 and Form 433-A(OIC) instructions.)
  • Include pay stubs, bank statements, statements for rental or portfolio income, insurance bills, and documentation for unusual or large expenses.
  1. Start with accurate income documentation
  • Gather pay stubs covering the most recent pay periods, year-to-date totals, and W-2s/1099s for the current year and prior year when available.
  • For self-employed or small-business income, use profit-and-loss statements, invoices, and 12–24 months of bank statements. If income varies, compute a monthly average and explain seasonal trends.
  • Include non-wage income: Social Security, unemployment, rental receipts, alimony, dividends, and trust distributions.
  1. Use IRS Collection Financial Standards for living expenses
  • The IRS allows certain national and local standards for food, clothing, and transportation as well as actual necessary expenses for housing and utilities. Apply these standards consistently and document exceptions (medical bills, child care).
  • Don’t invent expenses. If you claim an unusual or high recurring cost (e.g., medical treatments), include invoices and proof of payment.
  1. List assets with current, supportable values
  • Bank accounts: provide statements with current balances.
  • Vehicles: use a reputable pricing source (NADA, Kelley Blue Book) and show mileage and condition; be conservative in estimating fair-market value.
  • Real estate: provide current mortgage statements, recent property tax assessments, or an appraisal.
  • Retirement accounts: list balances, but note many retirement plans are generally excluded from collection if their withdrawal would create undue hardship; however, the IRS still factors in available equity toward RCE.
  • Business assets: include ledgers, balance sheets, and depreciation schedules. Be prepared to justify the value and demonstrate whether assets are essential to earning income.
  1. Document liabilities and priority debts
  • Provide statements for mortgages, car loans, credit cards, student loans, medical bills, and secured debts. Highlight liens, garnishments, or pending bankruptcy filings.
  1. Calculate monthly disposable income and RCE
  • Monthly disposable income = total monthly income minus allowed monthly expenses. Multiply by a reasonable collection period (often the remaining time in the collection statute or a period IRS deems appropriate) to estimate collectible funds.
  • The IRS computes RCE by adding any nonexempt asset equity to a realistic projection of future monthly disposable income.
  1. Prepare the offer amount and payment strategy
  • Lump-sum cash offers generally require 20% of the offer amount with submission and the remainder in five or fewer payments.
  • Periodic payment offers require the first proposed payment with the application and continuing monthly payments while the offer is under consideration. The application fee ($205 as of 2025) is generally required unless you meet the low-income certification (see IRS guidance).
  • Carefully align the offered figure to RCE: offers significantly below computed RCE are likely to be rejected.

Documentation checklist (attach every item you can)

  • Signed Form 656 and completed Form 433-A(OIC) or 433-B(OIC)
  • Pay stubs (last 2–3 months), W-2s, 1099s, business profit-and-loss statements
  • Last 3–6 months of bank statements for all accounts
  • Mortgage and property tax statements, vehicle titles and loan statements
  • Medical bills, care contracts, and insurance statements for large recurring expenses
  • Proof of state/local tax obligations and prior IRS notices
  • Court orders (alimony, child support) and proof of payments
  • Third-party valuations or appraisal reports for real estate or business assets

Common valuation and reporting pitfalls (and how to avoid them)

  • Inflating expenses to force a lower RCE: The IRS cross-checks expenses with national/local standards and supporting documents. Use real, recurring bills or documented one-time costs.
  • Overstating asset discounts or understating vehicle/real-estate fair-market values: Use published pricing guides or recent sales comps and include sources.
  • Missing documentation for self-employment income: Reconcile bank deposits with invoices and expense logs.
  • Forgetting co-owned property: IRS considers your share of jointly held assets—report the correct percentage and supporting proof.

What the IRS looks for (how they evaluate your financial picture)

The IRS wants to know whether it can reasonably collect your liability now or in the future. Examiners review:

  • Accuracy and consistency across forms and attachments
  • Support for claimed income and expenses
  • Equity in nonexempt assets
  • Whether proposed payments are realistic and consistent with historic cash flow

For more detail on how the IRS evaluates offers, see our guide: Inside an Offer in Compromise: How the IRS Evaluates Your Financial Picture.

Practical examples from practice

Example 1 — Individual with limited cash flow:
A client with irregular gig income, recent medical bills, and low bank balances had an initial RCE that looked higher than reality because certain medical expenses hadn’t been documented. After assembling 12 months of bank statements, copies of hospital bills, and a detailed monthly budget using IRS standards, the RCE calculation fell to an amount the client could offer. The IRS accepted a periodic-payment OIC.

Example 2 — Small business owner with illiquid assets:
A business owner claimed that equipment was necessary to operate and could not be liquidated. We provided profit-and-loss statements, depreciation schedules, and three independent equipment valuations. The IRS accepted a negotiated amount after valuing the business equity conservatively.

What to do if your OIC is rejected or questioned

  • Review the denial letter carefully — it should list the primary reason(s). You can appeal with Form 13711 (Request for Appeal of Offer in Compromise) or submit additional supporting documentation if the rejection cites insufficient evidence.
  • Consider other collection alternatives: installment agreement, currently not collectible status, or, in some cases, bankruptcy. See our article comparing alternatives to an OIC: Alternatives to an Offer in Compromise: When to Consider Other Options.

Timing, fees, and expected processing

Processing time varies based on IRS workload and the completeness of your package. Offers commonly take several months to a year. Include the IRS application fee (unless you qualify for a low-income waiver) and the required initial payment with Form 656 when applicable. For rules about payments and the application fee, consult the IRS OIC instructions: https://www.irs.gov/individuals/offer-in-compromise.

Professional tips to improve acceptance chances

  • Assemble the complete package before submission. Incomplete packages cause delays and often rejection.
  • Use conservative, supportable valuations for assets. Document sources.
  • If possible, work with a CPA or tax resolution professional experienced with OICs — professionals can help present a credible narrative and collect the right supporting documents.
  • Track all communications with the IRS and keep copies of everything submitted.

For step-by-step income documentation, see our focused walkthrough: How to Prepare Proof of Income for an Offer in Compromise Application.

For more on valuing assets and the RCE concept, see: Assessing Reasonably Collectible Equity for an Offer in Compromise.

Final checklist before you file (quick review)

  • All forms signed and dated
  • Supporting documents attached and labeled
  • Payment/envelope prepared for the application fee and initial payment, if required
  • Copy of entire packet saved for your records

Professional disclaimer: This article is educational and based on general IRS guidance and my experience as a CPA working with taxpayers on OICs. It is not individualized legal or tax advice. Contact a qualified tax professional for help specific to your situation.

Authoritative references