Let’s get straight to it: the IRS doesn’t accept every Offer in Compromise (OIC). While this program can be a game-changer for taxpayers struggling with overwhelming tax debt, the application process is no walk in the park. Understanding why your offer might get rejected or returned can help you avoid costly mistakes and increase your chances of success.
So, why would the IRS reject your OIC? It boils down to incomplete paperwork, failing to meet eligibility criteria, or other common pitfalls. Let’s dive deeper into the details so you can confidently navigate the process and move closer to financial freedom.
Common Reasons the IRS Returns an Offer in Compromise
Sometimes, the IRS doesn’t outright reject your offer but returns it due to issues with your application. Here are the main reasons why that happens:
Incomplete Forms and Missing Documentation
One of the most frequent mistakes people make is submitting an incomplete OIC application. Forgetting essential forms like Form 656 (Offer in Compromise) or Form 433-A (Collection Information Statement) can lead to an automatic return. The IRS relies on these forms to assess your financial situation and determine if your offer is reasonable. Double-check everything before you submit to avoid delays or rejections.
Failure to Include Required Payments
When you submit your OIC, it’s not just about paperwork. You’re also required to include an application fee and an initial payment. Depending on your offer type, that could mean paying 20% of your proposed amount upfront or including your first installment for a longer-term plan. If you forget or miscalculate, the IRS will return your offer without hesitation. Pro tip: If you qualify as a low-income taxpayer, you might be able to skip the application fee and initial payment—so check your eligibility carefully.
Bankruptcy Proceedings
If you’re currently in an open bankruptcy case, the IRS won’t consider your OIC. Bankruptcy puts your financial affairs under the court’s control, and any tax resolution efforts, including an OIC, would conflict with that process. If you’re considering both bankruptcy and an OIC, it’s best to consult a tax relief expert like Tax Resolution Services of Hawaii for guidance.
Unfiled Tax Returns
The IRS requires all your tax returns to be up-to-date before they’ll even look at your OIC. If you have missing returns, your offer will be returned until you file them. Staying compliant is non-negotiable when dealing with tax relief programs.
Failure to Make Estimated or Withholding Tax Payments
Submitting an OIC doesn’t mean you can neglect your current tax obligations. You’ll need to stay on top of your estimated tax payments or ensure sufficient withholding for the tax year in which you submit your offer. If you fall short, your OIC will be returned.
Using an OIC to Delay the Process
The IRS isn’t easily fooled. If they determine that you’ve submitted an OIC solely to delay collection efforts, your offer will be rejected. For instance, if you’ve submitted a nearly identical offer to one that was previously denied, the IRS may view this as a stalling tactic.
Dealing with a Returned Offer for an Offer in Compromise
When the IRS considers returning your Offer in Compromise (OIC), they usually give you a chance to fix any problems first. This might involve submitting missing paperwork, filing overdue tax returns, or catching up on unpaid balances. Treat these requests with urgency—responding promptly could mean the difference between keeping your offer on the table or having it returned altogether.
If your offer is returned despite your best efforts, don’t lose hope. You still have options. One approach is to contact the IRS and formally object to their decision. While the IRS isn’t obligated to reconsider a returned offer, they sometimes will, especially if it serves their interests as well as yours. If your objection doesn’t succeed, you can still address the flagged issues—whether it’s completing a missing document or correcting an error—and resubmit your offer. The important thing is to ensure everything is in order before trying again.
Reasons the IRS Might Reject Your Offer in Compromise
Even when an offer survives the initial review, the IRS might reject it for a variety of reasons. Here are some of the most common:
1. The IRS Thinks You Can Pay More
This is the most frequent reason for rejection. The IRS scrutinizes your financial situation—looking at your income, necessary living expenses, and the equity in your assets. If they determine you can afford to pay more than you’ve offered, they’re likely to decline your OIC.
Here’s what typically happens:
- The IRS calculates what they believe you can reasonably pay based on their formulas.
- Before issuing a rejection letter, they usually call to explain their calculations and give you a chance to provide more financial details if you think they’ve made an error.
- If you can show that their figures are incorrect, you might still salvage your offer.
Being transparent and providing accurate, detailed financial information upfront can reduce the risk of rejection on these grounds.
2. Not in the Best Interest of the Government (NIBIG)
The IRS can reject an offer if they determine it’s not in the government’s best interest to accept it.
Examples of why this might happen include:
- A history of tax noncompliance, such as repeatedly failing to report all your income or neglecting to pay taxes when you were financially able to.
- Evidence of fraudulent behavior, like participating in refund schemes or submitting false tax returns.
- Previous penalties related to misconduct, such as fraud by a tax preparer or aiding others in tax evasion.
These decisions are reviewed by senior IRS officials, such as a Territory or Operations Manager, to ensure fairness.
3. Public Policy Concerns
Occasionally, the IRS will reject an OIC to uphold public confidence in the tax system. This happens when accepting an offer might send the wrong message or appear to condone improper behavior.
For example:
- If you’ve publicly encouraged others to avoid paying taxes or comply with tax laws, the IRS may decide rejecting your offer is necessary to preserve the integrity of the system.
- Similarly, if there are signs you’ve concealed profits from criminal activity or are still engaged in illegal practices, your offer could be denied on these grounds.
While these situations are rare, they highlight the importance of maintaining transparency and good faith in your dealings with the IRS.
4. Doubt as to Liability Rejections
If you believe the IRS has made an error in calculating your tax debt, you can submit an OIC based on “Doubt as to Liability” (DATL). However, these offers are challenging to win.
Common reasons for rejection include:
- The IRS believes their assessment is correct and stands by their calculations.
- You refuse to withdraw your offer even after the IRS adjusts your account to address the issue.
When pursuing a DATL offer, it’s critical to provide clear evidence and supporting documentation to back up your claim.
Appeal Rights for a Rejected Offer in Compromise
If your OIC is rejected, don’t give up—there’s still an opportunity to appeal. The IRS gives you the right to challenge their decision through the Independent Office of Appeals. This process allows your case to be reviewed by a neutral party.
To appeal a rejection:
- Carefully review the rejection letter to understand why your offer was declined.
- Gather additional evidence or documentation that supports your case.
- File your appeal within 30 days of the rejection letter using IRS Form 13711, “Request for Appeal of Offer in Compromise.”
The appeals process is your chance to present a stronger case. Consider seeking guidance from a tax professional to improve your chances of success.
How to Improve Your Chances of Acceptance in the Offer in Compromise Program
Getting your OIC approved takes preparation and attention to detail. Here are some steps to increase your likelihood of success:
- File All Tax Returns: The IRS requires all your tax returns to be up to date before they’ll consider your offer. If you have any missing filings, address them immediately.
- Stay Current on Payments: If you’re required to make estimated tax payments, make sure they’re up to date. Falling behind could derail your OIC.
- Provide Accurate Financial Information: The IRS reviews your financial disclosures carefully. Be thorough and honest—overstating expenses or underreporting income can backfire.
- Address Compliance Issues: If you have a history of tax noncompliance, show that you’ve corrected the behavior. Staying compliant with current tax obligations can work in your favor.
- Seek Professional Help: Tax relief experts like Tax Resolution Services of Hawaii specialize in navigating the OIC process. They can help ensure your paperwork is in order, your financial disclosures are accurate, and your offer is presented in the strongest possible light.
While the Offer in Compromise program isn’t easy to navigate, it’s a powerful tool for resolving tax debt if approached correctly. With preparation, compliance, and possibly professional assistance, you can put your tax troubles behind you and move toward a fresh financial start.
Why Would an Offer in Compromise Be Rejected?
The Offer in Compromise (OIC) program is an invaluable option for taxpayers seeking relief from overwhelming tax debt. However, it’s important to understand the potential reasons for rejection, from incomplete paperwork and unfiled returns to financial miscalculations and compliance issues. By addressing these challenges proactively, you can greatly improve your chances of having your offer accepted and achieving a fresh financial start.
If navigating the OIC process feels overwhelming, remember that you don’t have to do it alone. At Tax Resolution Services of Hawaii, we specialize in helping individuals resolve their tax issues without adding unnecessary financial strain. Contact us today to explore how we can help you successfully submit your Offer in Compromise and finally get the tax relief you deserve.
Key Points to Remember
- Common Reasons for OIC Returns: Missing forms, unfiled tax returns, unpaid estimated taxes, or submitting an offer during bankruptcy.
- Top Rejection Reasons: The IRS may believe you can afford to pay more, your offer doesn’t serve the government’s best interest, or public policy concerns.
- Fixing Returned Offers: You can object to a return or resubmit after addressing any deficiencies.
- Appealing a Rejected OIC: File an appeal within 30 days, presenting additional evidence to the Independent Office of Appeals.
- Boosting Your Chances: File all tax returns, stay current on payments, provide accurate financial disclosures, and consider expert assistance.
Frequently Asked Questions (FAQs) About Offer In Compromise
- How do I know if I qualify for an Offer in Compromise?
Qualification depends on your ability to pay, income, expenses, and asset equity. The IRS provides a pre-qualifier tool to help you determine if you meet the requirements. - Can I submit an OIC while in bankruptcy?
No, the IRS will not consider an Offer in Compromise while you are in active bankruptcy proceedings. You’ll need to resolve your bankruptcy case first. - What happens if my Offer in Compromise is rejected?
If your offer is rejected, you can appeal the decision within 30 days by submitting IRS Form 13711. Alternatively, you can fix any issues and resubmit your offer. - How long does it take for the IRS to decide on an OIC?
The IRS typically takes 6 to 12 months to review and decide on an OIC. Complex cases may take longer. - Does submitting an OIC stop IRS collection efforts?
While your OIC is under review, the IRS generally halts collection actions, such as garnishments or levies. However, penalties and interest may still accrue. - Can I pay my OIC in installments?
Yes, the IRS offers two payment options for accepted OICs: a lump-sum payment or periodic installments over time.
What Others Have Experienced
Contributor 1:
Most offers don’t get accepted by the IRS, so try not to take it personally. If you weren’t deeply involved in the process, you might want to check out the Pre-Qualifier and the 656-B booklet.
The Form 433-A helps determine your Reasonable Collection Potential. To fill it out, average your income and expenses from the past year to calculate monthly amounts. Include estimated tax payments under “Monthly Household Expenses,” and don’t forget state income taxes if applicable.
Subtract your total monthly expenses from your income to determine what the IRS considers discretionary income. Keep in mind, this might differ from what you actually have left over, as unsecured debts like credit card payments usually aren’t factored in. Payments on secured debts are typically allowed, though.
If your monthly income is around $3,000, you might qualify for Currently Not Collectible (CNC) status. If Box F on your form equals $0, you’d likely be approved for CNC.
If Box F is less than $580, you might qualify for a Partial Payment Installment Agreement (PPIA). With a PPIA, you make manageable monthly payments until the debt is paid or the Collection Statute Expiration Date (CSED) is reached.
Be cautious when submitting an Offer in Compromise (OIC). While it’s under review, the CSED clock pauses, potentially giving the IRS more time to collect. Usually, the collection window is ten years from when the tax was assessed.
Before submitting another OIC, it’s wise to seek a second opinion. Sometimes, setting up a payment plan is a better long-term solution.
Contributor 2:
The IRS typically won’t consider an Offer in Compromise if they believe they can collect the full amount before the collection statute runs out (generally ten years from the tax assessment date).
For a long-term installment plan (72 months), you might only need to pay about $40 per month on your current balance. That would allow you to clear the debt with time to spare.
Without knowing your income or assets, it’s hard to give definitive advice. However, with a relatively small balance and plenty of time left on the collection period, an OIC might not be accepted. The acceptance rate is around 30%.
When submitting an OIC, you’ll need to provide a financial statement detailing your income, assets, and monthly expenses. The IRS uses allowable expense standards based on national or regional averages. For example, if the housing allowance in your area is $1,400, but you’re spending $1,800, the IRS will only consider $1,400 when calculating excess income.
They’ll also consider your future earning potential. If you’re struggling now but likely to earn more before the statute expires, the IRS may reject your offer.
Don’t let this discourage you—if you qualify, it’s worth trying. But based on the details shared, it seems unlikely. Alternatively, you might qualify for CNC status, where the IRS temporarily pauses collection efforts. Keep in mind, interest and penalties still accrue, and any future refunds will be applied to your debt.
Contributor 3:
An OIC can be a helpful option for some, but they’re often complex, time-consuming, and have a low approval rate. Many are denied due to incomplete forms or missing documentation.
Keep in mind, OICs aren’t negotiations—they’re based on a set formula that considers your income, assets, liabilities, and the time left on the collection statute.
If you’re considering professional help, be aware it can be costly. While the OIC is under review, the statute of limitations clock is paused, giving the IRS extra time to collect if the offer is rejected.
Alternatively, you could contact the IRS and ask about being classified as Currently Not Collectible (CNC). This essentially tells the IRS you’re unable to pay right now and asks them to revisit your case later. If approved, active collection efforts, such as wage garnishments, would stop, but any refunds would still be applied to the debt. The advantage? The statute of limitations clock keeps ticking even under CNC status.
