Why Was My Offer in Compromise Rejected?

Introduction

Dealing with tax debt can feel overwhelming, and the IRS provides several programs designed to help taxpayers resolve their outstanding liabilities. Among the most powerful tools available is an Offer in Compromise (OIC), a legal arrangement that permits taxpayers to settle their obligations for less than the total amount owed. However, not every OIC application receives approval. If your offer in compromise was rejected, understanding the reasons behind the denial and knowing your available options becomes essential.

This guide will explain what an OIC entails, identify common reasons for rejection, clarify the distinction between returned and rejected applications, and outline strategies to enhance your likelihood of approval. We'll also explore alternative tax relief options such as Installment Agreements, Penalty Abatement, and Currently Not Collectible (CNC) status.

Understanding an Offer in Compromise (OIC)

Before exploring reasons for rejection, it's important to understand the OIC itself. Knowing how the IRS evaluates these offers can clarify why many applications fail.

What Is an Offer in Compromise?

The IRS offers a settlement program called an Offer in Compromise that helps resolve tax debts when full payment would cause financial hardship. This program enables taxpayers to negotiate a settlement amount that's less than their total tax obligation.

To qualify, a taxpayer must demonstrate that they are unable to pay their tax liability in full, either through lump sum or installment payments. The IRS's goal is to maximize collection while balancing the taxpayer's ability to pay.

Consider a scenario where someone owes $50,000 in taxes but can realistically afford only $15,000 based on their income, assets, and expenses. The IRS might approve an OIC for the reduced amount, though approval isn't automatic, and numerous applications face rejection because of rigorous evaluation criteria.

How the OIC Process Works

Understanding the process is crucial because most rejections stem from missteps during submission or evaluation.

Submission starts the process. Applicants need to fill out IRS Form 656 along with comprehensive financial forms (Form 433-A or 433-B), ensuring all paperwork is submitted correctly and completely. In the first review phase, IRS examiners verify that the application is complete. Any mistakes or incomplete documentation may result in the OIC being sent back for corrections.

After passing the initial review, the IRS conducts a thorough evaluation, determining your reasonable collection potential (RCP)—the amount the agency calculates you can afford based on your assets and projected income. The IRS then makes a final determination: accept, reject, or return the application for modifications. Generally, the OIC process spans 6-12 months from submission to final decision. Being aware of these stages helps taxpayers prepare for challenges and steer clear of errors that commonly result in denial.

Common Reasons an OIC Is Rejected

Even meticulously prepared applications can face denial. Knowing the specific reasons your offer in compromise was rejected helps determine your best path forward.

Insufficient Offer Amount

The IRS evaluates your proposed settlement amount against your reasonable collection potential (RCP). When your offer falls short of what the IRS calculates you can afford, rejection becomes likely.

Let's look at an example. A taxpayer with $20,000 in bank savings and steady monthly income proposes an OIC for $5,000. The IRS calculates the RCP at $18,000, meaning the offer is too low, and the application will be rejected.

Incomplete or Incorrect Application

Applications that lack completeness or contain errors frequently result in denial. Common issues include unsigned forms, missing financial documentation, or income figures that don't match your records.

It's vital that all financial documents—including bank statements, income reports, and asset records—match the information provided on your OIC forms. Minor discrepancies can lead to rejection.

Noncompliance With Tax Filing and Payment Requirements

The IRS exclusively reviews OICs from compliant taxpayers. This requires filing all necessary tax returns and keeping current on estimated tax payments or any existing installment agreements.

Not meeting these compliance standards significantly raises the probability that your offer in compromise will be denied.

Financial Ability to Pay

An OIC may be denied if the IRS concludes you have the means to pay your full debt through alternative methods. These might involve liquidating assets, tapping into savings or investment accounts, or raising monthly payments gradually. Exaggerating expenses or minimizing income typically doesn't work, since the IRS applies rigorous standards to evaluate a taxpayer's actual financial capacity.

Prior OIC History or Other IRS Concerns

Applicants who previously had OICs denied or who are currently under audit may encounter heightened examination. The IRS might refuse new offers when there are concerns about compliance issues or inaccurate information in earlier applications.

As an illustration, someone whose OIC was denied for comparable debt two years earlier and who files a new application with minimal modifications could face rejection because the changes or supporting documentation aren't substantial enough.

Returned vs. Rejected OICs: Understanding the Difference

Taxpayers often confuse "returned" and "rejected" OICs. Knowing the distinction can influence how you respond.

Returned OIC

When the IRS identifies mistakes or missing information in your application, they return it for corrections. This typically happens due to incomplete financial records, forms that are incorrectly filled out or unsigned, or failure to pay required application fees.

Unlike a rejection, a returned OIC isn't a permanent denial. You can fix the identified issues and resubmit your application, which may still be approved.

Rejected OIC

A rejected OIC indicates the IRS has reviewed your application and concluded it doesn't satisfy the acceptance standards. Rejection can occur when your offer amount is lower than reasonable collection potential, you haven't met compliance obligations, or your financial hardship lacks adequate documentation.

After rejection, you can appeal the decision or submit a revised application with substantial modifications. A denial signals that the IRS considers your offer insufficient to meet acceptance requirements.

What Happens After an OIC Is Rejected

Getting a rejection letter can feel disheartening, but it doesn't mean you're out of options. Learning how the IRS handles post-rejection procedures enables you to take productive action.

Notification from the IRS

The IRS will mail you a letter detailing the outcome of your OIC. This correspondence explains the total amount owed compared to your offer, identifies the rejection reason or reasons, and describes available options for moving forward. Carefully reviewing this notification is crucial, as it shapes your response and helps you plan your approach for either appealing or resubmitting.

Options After Rejection

After an offer in compromise is rejected, taxpayers can pursue several paths. They may request an appeal with the IRS Office of Appeals to present additional evidence or clarify misunderstandings. Submitting a new OIC is also an option if circumstances have changed, ensuring that the new application addresses the IRS's prior concerns. Alternatively, taxpayers can explore other IRS resolution programs such as installment agreements, partial payment plans, or penalty abatements.

Appealing a Rejected Offer in Compromise

Even after your offer in compromise is rejected, you might still be able to appeal. The Internal Revenue Service (IRS) permits you to seek review from its Independent Office of Appeals within 30 days of receiving the rejection notice. Your appeal should be mailed to the IRS office specified in your rejection letter and must contain either a filled-out Form 13711 or a written statement explaining your disagreement, listing the relevant tax periods, and providing the facts and legal reasoning that support your case. Additionally, you'll want to review the financial data from your original OIC against the Income/Expense (IET) and Asset/Equity (AET) Worksheets the IRS provided, then include documentation challenging any figures you think are wrong.

How to Avoid OIC Rejection Before Filing

Taking proactive steps before filing offers the strongest protection against OIC rejection. Knowing IRS expectations and preparing a thorough, precise application can dramatically boost your approval odds.

Ensure Accurate and Complete Documentation

Prior to filing, collect all required financial documents such as bank statements, pay stubs, investment account records, and debt information. Double-check every figure on Form 656 and all supporting paperwork. Discrepancies between your reported income and expenses, or leaving out any income sources, can trigger instant rejection. Thorough and precise documentation is essential for accurately representing your financial circumstances.

Meet IRS Compliance Requirements

The IRS won't review an OIC from a non-compliant taxpayer. Submitting all overdue tax returns, maintaining current tax payments, and keeping any installment agreements current are critical prerequisites before filing. Showing compliance demonstrates to the IRS that you're operating in good faith and bolsters your application.

Work With a Tax Professional

Enlisting a tax professional can boost your approval probability. Applications prepared with professional assistance actually show substantially higher acceptance rates compared to the general average. A professional can check your financial details for correctness, determine your reasonable collection potential, and create a compelling OIC that aligns with IRS standards. Their knowledge proves especially helpful for complicated situations, including multi-year tax debts, substantial assets, or previous rejections. Tax professionals can also assist with the appeal process should your OIC be denied.

Frequently Asked Questions