Chapter 10 – The IRS Offer in Compromise Application Process

Forms 656, 433-A (OIC), 433-B (OIC), Documentation Requirements, and How the IRS Reviews Your Application

Quick Answer

Submitting an Offer in Compromise involves much more than completing a few IRS forms.

An Offer package is a detailed financial presentation that allows the IRS to evaluate:

• Your current financial condition
• Your filing compliance
• Your assets
• Your income
• Your allowable living expenses
• Your future ability to pay
• Whether your Offer meets the legal requirements for acceptance

The IRS generally does not approve Offers based on hardship alone or because a taxpayer simply cannot pay immediately. Every application is reviewed under established legal standards using detailed financial information and supporting documentation.

One missing document—or one inaccurate financial disclosure—can delay the review or prevent the IRS from fully evaluating the application.

Before You Ever Prepare an Offer

One of the biggest misconceptions is that filing an Offer should be the first step.

In our experience representing taxpayers for more than 20 years, the Offer itself is often one of the last steps in the preparation process.

Before preparing the application, we typically evaluate:

✓ Have all required tax returns been filed?

✓ Is the taxpayer currently compliant?

✓ Are estimated tax payments current?

✓ Are payroll deposits current?

✓ Has the IRS assessed every balance?

✓ What is the Collection Statute Expiration Date?

✓ Is a Revenue Officer assigned?

✓ Are appeals pending?

✓ Would another resolution option be stronger?

Only after answering these questions do we determine whether preparing an Offer makes sense.

Step One — Verify Filing Compliance

The IRS generally expects taxpayers to be current with their filing obligations before an Offer will be considered.

This usually means:

• Required individual returns filed
• Business returns filed
• Payroll returns filed
• Information returns filed when applicable

Many taxpayers assume they can “fix the filing problem later.”

Unfortunately, filing compliance is frequently one of the first issues reviewed.

Lesson From More Than 500 IRS Cases

Lesson #14

Many taxpayers spend weeks preparing financial statements…

…only to discover they were not filing compliant.

Preparation should begin with compliance.

Step Two — Gather Financial Documentation

The IRS wants documentation.

Not estimates.

Not approximations.

Documentation.

Depending upon the taxpayer’s circumstances, supporting records include:

Income

• Pay stubs
• W-2s
• 1099s
• Pension statements
• Social Security documentation
• Rental income records
• Business income reports

Bank Accounts

Generally:

• Recent statements
• Checking
• Savings
• Money market
• Business accounts

Investments

• Brokerage statements
• Retirement statements
• Cryptocurrency accounts
• Mutual funds
• Stocks
• Bonds

Housing

• Mortgage statements
• Lease agreements
• Property tax information
• Homeowners insurance
• HOA dues

Vehicles

• Registration
• Loan payoff
• Current value
• Insurance

Medical

• Insurance premiums
• Medical bills
• Prescription costs
• Ongoing treatment expenses

Business Owners

Often require additional records such as:

• Profit & Loss Statements
• Balance Sheets
• Payroll reports
• Accounts receivable
• Accounts payable
• Business bank statements
• Equipment lists

Form 656

The Offer Itself

Form 656 is often viewed as “the Offer.”

In reality…

It is more accurately the contract between the taxpayer and the government.

Among other things, it identifies:

• Taxpayer information
• Tax periods involved
• Offer amount
• Payment option selected
• Basis for compromise
• Certifications
• Required acknowledgments

Signing Form 656 carries important legal implications because the taxpayer certifies, under penalties of perjury, that the information provided is true and complete.

Form 433-A (OIC)

The Individual Financial Statement

This is one of the most important documents in the entire Offer package.

Think of it as the taxpayer’s financial biography.

The IRS uses this form to evaluate:

• Employment
• Income
• Monthly expenses
• Assets
• Bank accounts
• Investments
• Retirement accounts
• Real estate
• Vehicles
• Credit cards
• Loans
• Business interests
• Life insurance
• Other financial resources

Every figure should be supported whenever possible.

Form 433-B (OIC)

Businesses generally complete Form 433-B (OIC).

The IRS evaluates:

• Gross receipts
• Business income
• Inventory
• Equipment
• Accounts receivable
• Cash
• Payroll
• Expenses
• Loans
• Ownership interests

Business financial analysis becomes significantly more complex than individual Offers.

Why Accuracy Matters

Many taxpayers believe:

“It’s okay if my numbers are close.”

That can create problems.

The IRS compares financial information with:

• Tax returns
• W-2s
• Information returns
• Bank deposits
• Credit reports
• Property records
• Public records
• Internal IRS records

Consistency builds credibility.

Inconsistency often generates additional questions.

The IRS Reviews More Than Numbers

An Offer Specialist is not simply checking arithmetic.

The reviewer is also evaluating:

• Credibility
• Completeness
• Documentation
• Compliance
• Financial trends
• Asset ownership
• Future earning capacity
• Collection alternatives

A technically correct Offer can still require additional information before the IRS reaches a final decision.

Lessons From More Than 500 IRS Cases

Lesson #15

The IRS Notices Missing Information Faster Than Most Taxpayers Expect

Examples include:

• Missing signatures
• Missing schedules
• Undisclosed bank accounts
• Missing retirement statements
• Incomplete business records
• Missing supporting documents

Small omissions can create significant delays.

Lesson #16

Good Organization Helps

Revenue Officers and Offer Specialists review large numbers of files.

Providing organized documentation with clear explanations often allows the reviewer to understand the taxpayer’s financial situation more efficiently.

Well-organized submissions can also reduce unnecessary requests for additional information.

What Happens After the Offer Is Submitted?

Many taxpayers assume the IRS immediately approves or denies the application.

Instead, the process involves several stages.

Initial Review

The IRS reviews the package for completeness.

Required signatures.

Required payments (if applicable).

Required forms.

Compliance.

If major items are missing, the Offer can be returned without a full financial evaluation.

Assignment

If the Offer proceeds, it is assigned to an Offer Specialist for financial review.

The assigned employee can:

• Request clarification
• Ask additional questions
• Request updated financial information
• Verify asset values
• Review bank deposits
• Analyze expenses
• Evaluate business records

Financial Investigation

This becomes the longest phase.

The IRS carefully evaluates:

• Assets
• Income
• Expenses
• Equity
• Documentation
• Collection potential

Communication during this phase is important. Prompt responses to reasonable requests can help keep the review moving.

Decision

The IRS generally reaches one of several outcomes:

• Acceptance
• Rejection
• Return of the application for procedural reasons
• Withdrawal by the taxpayer
• Request for additional information before a final determination

Each outcome has different consequences and, in some cases, different appeal rights.

Case Study

Thorough Preparation Reduced Delays

Situation

A self-employed taxpayer owed approximately $214,000 in federal income taxes and wanted to pursue an Offer in Compromise. Before submitting the application, we performed a comprehensive review of the taxpayer’s financial records.

During that review, we identified several issues that could have delayed the IRS’s evaluation, including incomplete bank statements, an omitted retirement account, and inconsistencies between business income reported on tax returns and current financial statements.

Our Approach

Rather than filing immediately, we worked with the taxpayer to gather complete documentation, reconcile the financial information, and organize the supporting records into a clear, logical submission.

Outcome

The IRS was able to begin its financial review without issuing multiple preliminary requests for missing information. Although every Offer requires individual evaluation, careful preparation often helps the review process proceed more efficiently.

Frequently Asked Questions

How long does it take to prepare an Offer?

Preparation time varies depending on the complexity of the case, the number of tax years involved, the taxpayer’s financial circumstances, and how quickly supporting documentation can be assembled.

Can I estimate my expenses?

It is generally better to provide accurate, documented information whenever possible. Estimates can require clarification and can slow the review process.

Should I leave out assets that I don’t think matter?

No. The Offer process relies on full and accurate financial disclosure. Omitting assets or providing incomplete information can create significant issues and can undermine the credibility of the application.

What if my financial situation changes after I file?

Financial circumstances sometimes change while an Offer is pending. Depending on the nature of the change, the IRS can request updated information before making a final decision.

Why Careful Preparation Matters

At the national tax representation firm of Mike Habib, EA, we approach an Offer in Compromise as a comprehensive financial case—not simply a collection of IRS forms. Before recommending an Offer, we evaluate filing compliance, analyze the taxpayer’s financial condition, identify potential issues, and discuss all available resolution strategies.

Our goal is to help taxpayers make informed decisions based on the facts and the law. We believe in transparent flat-fee representation, so clients know the cost of our professional services upfront rather than worrying about accumulating hourly fees while their case is being prepared and reviewed.

Related chapters: Chapter 7 — The Complete Guide to the IRS Offer in Compromise; Chapter 11 — Why the IRS Rejects or Returns Offers in Compromise