Why accurate financial information matters

When you submit an Offer in Compromise (OIC), the IRS needs a complete, verifiable snapshot of your finances to decide whether the amount you propose is reasonable. The agency uses that package to compute your reasonable collection potential (RCP)—the amount it believes you can pay now or over time. In my practice helping clients with tax-resolution strategies, applications that include clear, dated source documents plus an explanatory cover letter are accepted and processed more quickly than those that are incomplete or vague (IRS: Offer in Compromise).

Authoritative source: See the IRS OIC overview for application rules and documentation requirements: https://www.irs.gov/individuals/offer-in-compromise-what-it-is-and-how-it-works and Publication 594 for collection rules.

Below is a field-tested checklist of what to include, why each item matters, and practical tips for assembling a complete financial package.

Core documentation categories (what to include and examples)

1) Income — show all sources and frequency

  • Pay stubs covering at least the last 30–90 days (or year-to-date earnings if seasonal).
  • Federal tax returns (most recent filed returns; if you missed returns, file them before applying).
  • 1099s, W-2s, and schedules showing self-employment profits/losses.
  • Social Security, unemployment, pension, rental, and investment income statements.

Why it matters: The IRS projects future income from current and recent returns to estimate what you can pay. Underreporting income is commonly detected and harms credibility.

2) Monthly living expenses — verifiable ongoing expenses only

  • Bank and credit-card statements showing recurring bills (rent/mortgage, utilities, insurance).
  • Receipts or invoices for medical costs, child care, tuition, and other necessary expenses.
  • Court-ordered payments (alimony, child support) documented by court orders and bank debits.

Practical note: The IRS allows reasonable living expenses using national and local standards; you must show the expense is necessary and recurring. Avoid including discretionary or inflated expenses without substantiation.

3) Assets — liquid and non-liquid

  • Bank statements for all checking, savings, money market, and brokerage accounts.
  • Titles/deeds for vehicles and real estate, current loan balances (to show net equity).
  • Retirement account statements (IRAs, 401(k)), noting loans and early-withdrawal penalties if relevant.
  • Business asset schedules for small-business owners (equipment, inventory, accounts receivable).

Why detail matters: The IRS evaluates what could realistically be realized today (liquid assets) and what might be collected over time (equity, retirement after penalties).

4) Liabilities and special circumstances

  • Loan and credit statements, outstanding mortgage payoff amounts, and unpaid taxes.
  • Medical bills, bankruptcy filings, and documentation of recent job loss or disability.

Special-circumstance evidence: For large medical expenses or temporary unemployment, include doctor statements, termination letters, or insurance records to support hardship claims.

How the IRS calculates your Reasonable Collection Potential (RCP)

The RCP is the IRS’s estimate of what it can collect from you now and in the future. In simple terms:

RCP = Net realizable asset value (cash + marketable assets − costs to sell) + projected future income available for collection.

  • Net realizable asset value: The IRS looks at account balances, equity in property (after allowed liens/loans), and the realistic value of assets.
  • Future income: The IRS applies allowable living expense standards and subtracts those from your monthly income to determine what can go toward taxes.

Example: If your net assets total $4,000 and your projected disposable income over a reasonable collection period is $6,000, the IRS’ RCP would be $10,000. If your tax liability is $25,000, a properly-calculated OIC might propose settling for an amount near or below that RCP.

Caveat: The IRS uses national and local expense allowances and may disallow atypical expenses. Document everything and explain anomalies in a cover letter.

How to present the documentation (format and organization)

  • Start with a one-page cover letter summarizing your situation and list of attached documents. Explain income variability and any one-time events (medical emergency, natural disaster, job loss).
  • Use tabs or a numbered index that corresponds to the IRS form fields. Label each attachment (e.g., A1: 2023 Form W-2; B3: Bank Statement July–Sept 2024).
  • Provide consecutive bank statements (not screenshots) and highlight the lines you want the reviewer to see (deposit lines, large withdrawals).
  • If you dispute an asset valuation (e.g., a vehicle worth less than Kelley Blue Book), include an appraisal or repair estimates.

Tip from practice: Organize a PDF folder by category and include a one-page annotated summary of monthly cash flow—this saves time for the reviewer and reduces follow-up requests.

Common mistakes that delay or doom applications

  • Missing tax returns: The IRS requires all required returns to be filed to consider an OIC.
  • Incomplete bank history: Partial statements or redacted pages raise questions.
  • Unsupported expenses: Listing high recurring expenses without receipts or contracts commonly leads to denial.
  • Ignoring equity: Not disclosing saleable assets or retirement account balances can trigger rejection or later default.

Avoid these by cross-checking your packet against the IRS OIC checklist and using a preparer experienced in offers in compromise.

Practical preparation timeline and payment rules to expect

  • Check required returns and file any missing forms before applying.
  • The IRS requires an initial payment with your application: for lump-sum offers, applicants generally include an initial payment (see the IRS OIC page for current procedures); for periodic offers, include the first proposed installment. Low-income taxpayers may be exempt from some fees—verify current rules on the IRS site.
  • Processing times vary; many cases take six months to a year depending on complexity and completeness.

If your offer is rejected, you may appeal the decision or explore alternatives such as installment agreements or bankruptcy in qualified cases—see our guide on Alternatives to an Offer in Compromise.

Related resources and internal guides

Final checklist before you mail or submit

  • Filed all required federal returns.
  • Included wage statements, recent bank statements, asset titles, and debt schedules.
  • Completed and signed the IRS Offer in Compromise form(s) and included the required initial payment (or proof of low-income exemption).
  • Prepared a one-page cover letter that explains volatility or unusual expenses and references each attachment.

Disclaimer and authoritative sources

This article provides educational information based on my experience in tax resolution and the IRS’s publicly available guidance; it is not individualized tax or legal advice. For advice tailored to your circumstances, consult a qualified tax professional or attorney.

Authoritative sources: IRS Offer in Compromise page: https://www.irs.gov/individuals/offer-in-compromise-what-it-is-and-how-it-works; IRS Publication 594 (Collection Process).

If you want, I can review a document checklist you’ve compiled and point out gaps commonly flagged by the IRS.