Why the financial disclosure matters
An Offer in Compromise (OIC) asks the IRS to accept less than the total tax owed. The single most important document the IRS uses to evaluate an OIC is your financial disclosure. It shows the agency your ability (or inability) to pay and forms the basis for the IRS’s calculation of your “reasonable collection potential.” In short: incomplete or inaccurate disclosures lead to delays, requests for more information, or outright denial.
Primary IRS references include the Offer in Compromise page and the instructions for Form 656 (Offer in Compromise) and collection information statements (Forms 433-A and 433-B) (see IRS: Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise).
Core components the IRS expects
When preparing an OIC financial disclosure, include the following sections. Treat each as a separate attachment with photocopies or digital scans of supporting documents.
- Income
- Recent pay stubs (generally 1–3 months) and W-2s or 1099s for the last tax year. For self-employed individuals, provide profit-and-loss statements, bank records, and 1099s.
- Other income: Social Security, unemployment, rental income, alimony, child support, investment dividends, and distributions. Fully document each source with statements or award letters.
- Expenses
- Necessary living expenses. List monthly costs for housing (rent or mortgage principal and interest), utilities, groceries, transportation (loan payments, fuel, insurance), health insurance and medical costs not covered by insurance, child care, and mandatory court-ordered payments.
- Debt payments. Document minimum monthly payments on credit cards, personal loans, medical debt, student loans, and vehicle loans.
- Use the IRS National and Local Standards as a guide but include documentation for extraordinary or unusual necessary expenses (medical bills, special education costs, high cost-of-living situations).
- Assets
- Cash accounts: bank statements with current balances.
- Retirement accounts: recent statements showing balances and any withdrawal restrictions.
- Vehicles: title information, current loan balance, and an objective estimate of market value (e.g., Kelley Blue Book or NADA report).
- Real estate: deed, recent tax assessment, mortgage payoff statements, and a reasonable market-value estimate (comparative market analysis or broker quote).
- Business assets: balance sheet, equipment lists, and valuation data for closely held businesses.
- Liabilities
- All outstanding debts with recent statements showing balances and minimum payments.
- Priority tax obligations or liens, child support arrearages, and secured debts.
- Note any debts that are in dispute, in bankruptcy, or subject to settlement.
- Supporting forms and declarations
- Form 656 (Offer in Compromise) — the offer form.
- Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) or Form 433-B (for businesses). These forms organize your income, expenses, assets, and liabilities in the format the IRS uses to compute collection potential.
- Power of attorney (Form 2848) if represented by a tax practitioner.
Documentation checklist (what to attach)
- 3 months of pay stubs or recent proof of income (year-to-date).
- Last 2 years of tax returns (if filed).
- 3–6 months of bank statements for all accounts.
- Recent statements for retirement accounts, investment accounts, and brokerage statements.
- Mortgage statements, vehicle loan statements, and credit-card statements.
- Appraisals or market-value guidance for real estate and business assets (if available).
- Medical bills, receipts for extraordinary expenses, and court orders for support payments.
- Business profit-and-loss statements and balance sheets for the most recent periods.
Practical valuation tips
- Be realistic with asset values. The IRS discounts asset values for quick-sale scenarios — overstating liquidation costs or understating home-equity can backfire. Provide third-party evidence for valuations: brokers’ opinions, recent comparable sales, NADA/KBB values for vehicles, and bank payoff statements for mortgages.
- Retirement accounts often have limited collection potential due to penalties and tax costs on early withdrawal; still, report correct balances and any withdrawal restrictions.
- For closely held businesses, separate personal and business financials. Provide a functional accounting of owner’s compensation, accounts receivable, and business debts.
Common mistakes and how to avoid them
- Omitting income sources: Include passive and irregular income (rental, royalties, unemployment). The IRS checks multiple data sources.
- Inflating expenses: Use receipts and bills. The IRS applies standard expense allowances for many categories; unsupported high expenses invite rejection.
- Underreporting assets: Failing to report investments, foreign accounts, or transferable property leads to denial and possible penalties.
- Missing forms: Omitting Form 433-A/433-B, power of attorney, or proof of income slows processing.
What to do when financial circumstances change
If your financial situation improves or worsens while your OIC is pending, notify the IRS immediately in writing and submit updated documentation. Significant changes (job loss, medical emergency, sale of property) can change the IRS’s assessment of collection potential and result in acceptance, counteroffer, or rejection.
Timelines, fees, and processing notes
Processing time for an OIC varies by case complexity and IRS workload; simple cases may take several months, complex cases longer. The IRS used to require an application fee and a partial-payment option for many offers. Fee amounts and low-income exceptions can change; always check the current Form 656 instructions on the IRS website before submitting (IRS: Offer in Compromise and instructions for Form 656: https://www.irs.gov/forms-pubs/about-form-656).
If your offer is rejected
The IRS will provide a reason for rejection and a deadline to appeal or request reconsideration. Common grounds for rejection include insufficient documentation, inaccurate valuations, and an offer amount that exceeds reasonable collection potential. If denied, you may:
- Request administrative appeal within the IRS.
- Submit a new offer if circumstances change.
- Consider alternative collection-relief options (installment agreements, currently not collectible status, or bankruptcy in limited circumstances).
For guidance on appeals procedures and typical IRS letters, see FinHelp’s explanations of OIC-related notices and the broader OIC process (for example, see “Offer in Compromise Process” and the Form 656 instructions on FinHelp).
Professional tips from practice
- In my practice handling over 500 tax resolution cases, the single biggest improvement clients make is complete documentation. A well-documented submission anticipates IRS questions and reduces requests for additional documents.
- Use bank and creditor statements rather than unaudited, handwritten notes.
- Organize your packet with a table of contents, numbered attachments, and a short cover letter explaining major items (e.g., recent job loss, medical emergency).
- If the case involves a business, separate personal and business records and clearly explain owner compensation and draws.
Sample cover checklist (to include with your packet)
- Cover letter summarizing the offer amount and reason for hardship.
- Form 656 fully completed and signed.
- Form 433-A or 433-B completed with attachments.
- Income documentation: pay stubs, 1099s, Social Security award letters.
- Bank statements (3–6 months).
- Asset documentation: vehicle valuations, mortgage statements, retirement account statements.
- Liability documentation: credit card statements and loan statements.
- Supporting explanations and third-party valuations where applicable.
- Power of attorney (Form 2848) if represented.
Useful resources and internal guidance
- IRS Offer in Compromise (official): https://www.irs.gov/individuals/offer-in-compromise
- FinHelp guidance: see our detailed instructions for Form 656 and practical documentation tips: “Instructions for Form 656, Offer in Compromise” (internal guide: https://finhelp.io/glossary/instructions-for-form-656-offer-in-compromise/) and our article on building a strong application: “Crafting a Strong Offer in Compromise: Documentation and Valuation Tips” (internal guide: https://finhelp.io/glossary/crafting-a-strong-offer-in-compromise-documentation-and-valuation-tips/).
Frequently asked questions (brief)
Q: Do I need to disclose retirement accounts?
A: Yes. Report account balances and withdrawal restrictions; the IRS considers them when calculating collection potential.
Q: Can I include future expected expenses?
A: The IRS normally evaluates current and recurring necessary expenses. Document extraordinary expected expenses with supporting evidence; the IRS reviews them case-by-case.
Q: Should I hire a professional?
A: Complex cases (business owners, multiple real estate holdings, significant investments) benefit from experienced tax resolution professionals. In my experience, professional representation reduces processing time and improves outcomes when cases are complicated.
Final notes and disclaimer
This article explains what the IRS typically expects in a financial disclosure for an Offer in Compromise. It is educational and not a substitute for personalized legal or tax advice. Tax rules and IRS procedures can change; always confirm current requirements on the IRS website or consult a qualified tax professional. In my practice, thorough documentation and transparency are the most reliable keys to a fair review.