Why documentation matters

The IRS evaluates an OIC based on your reasonable collection potential (RCP): what it can collect now and in the future. Missing or inconsistent paperwork directly affects the RCP calculation and is a top reason offers are rejected or delayed (IRS — Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise).

Quick checklist (what to include)

  • Completed Form 656 (Offer in Compromise) and the correct Form 433-OIC: Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.
  • Proof of income for the last 3 months (pay stubs, benefit statements, 1099s).
  • Bank statements (at least 3 months).
  • Documentation for monthly living expenses (leases, mortgage statements, utility bills, insurance).
  • Asset documentation (vehicle titles, real estate deeds, retirement statements with balances).
  • Copies of most recent federal tax returns.
  • Application fee (generally $205) or a low-income waiver, and required initial payment depending on the offer type (see IRS guidance).

See our Offer in Compromise application checklist for a full downloadable list: Offer in Compromise Application Checklist: Documents and Common Pitfalls.

Top documentation mistakes and how to fix them

  1. Incomplete or unsigned forms
  • Problem: Missing pages, unsigned lines, or wrong form versions force the IRS to return the packet.
  • Fix: Use the current Form 656 and the OIC-specific Form 433-A or 433-B. Sign every required line and attach all pages. Refer to the latest Form 656 instructions (IRS: https://www.irs.gov/pub/irs-pdf/f656b.pdf).
  1. Poor or missing income verification
  • Problem: Relying only on self-reported income or omitting 1099s/benefits (unemployment, Social Security, rental income) undermines credibility.
  • Fix: Attach recent pay stubs, employer statements, bank deposits, and 1099s. If income varies, provide several months of records and a written explanation.
  1. Insufficient bank statements or unexplained large deposits
  • Problem: The IRS treats unexplained deposits as available funds, which raises your RCP.
  • Fix: Supply at least 3 months of bank statements and annotate large transfers (sale of property, one‑time gifts). If funds were spent on living or medical expenses, provide receipts.
  1. Incorrect or optimistic asset valuations
  1. Missing expense documentation
  • Problem: Listing allowable expenses without backup (childcare invoices, medical bills, insurance) causes the IRS to disallow them.
  • Fix: Attach leases, medical statements, signed agreements, and utility bills. Keep copies of receipts and court orders for support obligations.
  1. Failure to document special circumstances and hardship
  • Problem: Vague statements about hardship don’t carry weight.
  • Fix: Provide a concise, dated cover letter explaining events (job loss, illness) and include corroborating documents (doctor’s notes, termination letters). For tips on documenting hardship, see our guide: How to Document Hardship for an Offer in Compromise.
  1. Submitting outdated tax returns or failing to file current returns
  • Problem: The IRS generally requires that you be current with filing obligations to accept an OIC.
  • Fix: File any missing returns before or with your submission and include proof of filing.

Procedural errors to avoid

  • Not paying the required application fee or initial payment (or not requesting a waiver if eligible).
  • Sending incomplete supporting documents without cross-referencing them on Form 433.
  • Mailing to the wrong IRS address or not using certified mail when recommended.

Practical tips from practice

  • Organize documents in tabs with a table of contents and label each exhibit (e.g., Exhibit A: Three months bank statements). Clear organization reduces review time and the chance of a return-for-more-info.
  • Keep digital copies and a master checklist. If the IRS asks for additional records, respond promptly—delays can lead to denial.
  • Consider limited professional help for complex assets or businesses; a CPA or tax attorney can prepare credible valuations and narratives.

Timeline and expectations

Processing can take several months; many cases take 6–12 months depending on complexity and IRS workload. The IRS provides application and FAQ pages with details on payments and timeframes (IRS: https://www.irs.gov/individuals/faq-offer-in-compromise).

When your offer is denied

If the IRS rejects an OIC you can request reconsideration or appeal. Review common denial reasons and next steps here: Common Reasons the IRS Rejects an Offer in Compromise and Next Steps.

Short real-world example

A small-business client omitted three months of bank statements showing a seasonal revenue drop; once we supplied the missing statements and a short explanation of seasonality with tax returns, the IRS recalculated RCP and accepted a reduced lump-sum offer.

Final checklist before you mail

  • All required forms completed and signed.
  • At least 3 months of bank statements and pay/benefit verification.
  • Documentation for all claimed expenses and asset valuations.
  • Application fee or properly documented low-income waiver.
  • Copies of filed tax returns and any missing returns prepared.
  • A clear table of contents that maps exhibits to Form 433 fields.

Professional disclaimer
This article is educational and does not replace personalized tax advice. For complex situations or large liabilities, consult a qualified tax professional or attorney. Authoritative IRS guidance on OIC is available at the IRS Offer in Compromise pages cited above.

Sources

Internal resources

(Information current as of 2025.)