The Internal Revenue Service provides a couple of tax relief options for taxpayers who might not be able to offset their taxes in full. An Offer in Compromise (OIC) is one of these options, which is an agreement with the IRS to settle your tax for less than what you owe.
However, like most other tax relief options, not every taxpayer qualifies for an OIC. That means that the IRS can deny or reject your OIC application based on some legitimate reasons. The possible reasons an OIC would be denied include submitting an offer that is too low, missing information, bankruptcy filing, not filing all tax returns, omitting the application, and other legitimate reasons discussed in detail later in this article.
At Victory Tax Lawyers, we do more than solve tax debt. Our team specializes in customized Offer in Compromise strategies and brings unmatched expertise to every case. Whether you’re managing back taxes or complex tax liabilities, our team minimizes risks and maximizes outcomes. With a proven track record of success, we provide a clear path to lasting financial relief. Schedule your free attorney consultation today and take the first step toward lasting financial relief.
In this post, we’ll examine the possible reasons why the IRS may reject an Offer in Compromise, what to do when your offer is rejected, how to get an OIC approved, and other important details you need to know to avoid.
What Is an Offer in Compromise (OIC)?
An offer in Compromise is a tax relief option offered by the Internal Revenue Service (IRS) that allows eligible taxpayers to settle their tax debt for less than the actual amount owed. It’s a legally binding agreement that takes into account the taxpayer’s income, expenses, asset equity, and overall ability to pay. The goal of this IRS program is to give individuals and businesses under significant financial pressure an avenue to resolve their tax liabilities in a way that is both realistic and fair to them and the government.
While an Offer in Compromise offers a fresh start and stops further enforcement actions for taxpayers, not every applicant qualifies for this program. The IRS has strict standards for reviewing each application, which implies that just submitting an offer doesn’t guarantee approval.
How to Qualify for an Offer in Compromise (OIC) Program
Qualifying for an Offer in Compromise requires that you meet necessary financial, procedural, or compliance criteria. The IRS mostly considers offers from taxpayers who are current, compliant, and not using the program to avoid ongoing tax responsibilities. So, you must make sure that:
- You must be current with your tax filings: Before the IRS considers your OIC, you must be in full compliance with filing all required tax returns. If you’re a business owner, your payroll tax deposits must also be current to avoid immediate disqualification.
- You are not currently in active bankruptcy: The IRS considers bankruptcy a separate legal process for settling debts, and it takes precedence over collection activity like an OIC.
- You must have received a bill for at least one tax debt included in your offer: This implies that your tax must be assessed and recorded in the IRS system. The Offer in Compromise cannot be used for speculative unpaid debts that have not yet been officially determined.
- You must have proof of inability to pay full tax debt: Your OIC application won’t be approved just because paying your debt is inconvenient. You must demonstrate that fulfilling your tax obligations would cause you extreme financial hardship or that it simply isn’t possible based on your income and assets.
- All required tax payments for the current year must be made: If you’re applying as an individual, the IRS wants to be certain that you’re no longer falling behind on current obligations before considering a settlement of prior debt.
- All federal deposits must be up to date: If you’re an employer, all federal tax deposits for the current and previous three quarters must be up to date. The IRS will reject your OIC application if you’re behind on payroll tax responsibilities.
- You must submit the correct form and fees: When applying for OIC, you’ll need to submit Form 656 as well as Form 433-A for individuals or Form 433-B for businesses. These forms present a breakdown of your financial limitations to the IRS. Unless you’re eligible for the low-income waiver, you’ll also need to pay a non-refundable $205 application fee.
In a case where you’re not sure if you meet all these conditions for qualification, the IRS has an online tool to help you determine if you might be eligible. Also, you can consult a tax professional who can ascertain whether you qualify and walk you through the entire application process.
Why Would an OIC Be Denied?
An Offer in Compromise would be denied if the IRS believes that you can afford to pay your full tax debt, have incomplete information, or aren’t fully compliant with filing and payment requirements. Many applications are rejected each year because applicants didn’t meet the necessary standards or provide the right information as required by the agency. These are the common reasons for OIC denial in detail:
1. The IRS Believes You Can Pay More Than Your Offer
A strict formula known as Reasonable Collection Potential (RCP) is used by the IRS to estimate the maximum amount they believe they can reasonably collect from you. This calculation includes:
- Your assets, such as real estate equity, vehicles, bank accounts, and retirement funds,
- Your future income, based on your current earnings minus the necessary living expenses.
- Your net equity
So, in a case where you owe $50,000 in taxes and offer to pay $500, even though you have equity in your home or a steady income and savings, you’ll most likely face automatic denial. The agency believes you can pay up what you owe, and they’d rather collect the full amount even if it takes a longer timeframe.
2. You’re Not Up to Date on Your Payment Obligations
The IRS will check to see if you’ve fulfilled your current tax obligations before they even review your OIC application. This means that all required tax returns must be filed, estimated tax payments must be current and if you’re an employer, all federal tax deposits must be made.
If you fail to be up to date with fulfilling your tax responsibilities, there is a high chance that your offer will be returned without consideration. In worst cases, it signals to the IRS that you’re not serious about resolving your tax debt or staying compliant moving forward.
3. You Are Non-Compliant During the Review Process
After you’ve submitted an OIC application, you must remain compliant throughout the IRS’s review period. Keep in mind that the Offer in Compromise review period lasts for about 6-12 months, sometimes longer. However, if you fail to file your tax returns or miss the required estimated tax payments during this period, your application could be denied even if you met all the necessary initial requirements.
Additionally, in a case where the IRS attempts to contact you for more documentation and you don’t respond promptly or provide what’s requested, your offer could be rejected due to a lack of cooperation.
4. You Can Pay in Full Through a Payment Plan
When reviewing your OIC application, the IRS will assess your overall financial health, which includes your monthly income, necessary living expenses, assets, and any disposable income. Once the review is completed and they determine that you could have extra money left after covering essential costs like rent, food, and medical bills, they believe you should enter a monthly Installment Agreement instead of settling your debt for less.
5. You Have an Incomplete or Inaccurate Application
The IRS expects you to include detailed financial forms like Form 656 (OIC application), Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, along with your pay stubs, bank statements, and proof of expenses when applying for an Offer in Compromise (OIC). If you fail to include documents, provide incomplete information, or make mistakes on your forms, your OIC will be denied. Also, if any form of inconsistency is noticed in the documents, they most likely won’t call you for clarification. Instead, they may automatically reject your application.
6. You’re in an Open Bankruptcy Case
Your OIC application won’t be considered by the IRS if you’re currently in an open bankruptcy case. This is because tax debts are addressed as part of your bankruptcy proceeding, and the IRS does not negotiate separate settlements during this process. You will be able to revisit your OIC eligibility once your bankruptcy is discharged or dismissed.
7. You Have a History of Non-Compliance and Tax Fraud
When you intend to enter an agreement with the IRS to settle your debt for less than what you owe, the agency will take a close look at your history to see if you’re honestly financially limited or if it’s an attempt to avoid your responsibilities. So, if your past tax behavior depicts consistent neglect, avoidance, or dishonesty, the IRS may not approve your Offer in Compromise.
8. The IRS Believes You’re Hiding Assets
If the IRS suspects that you didn’t report all your income or assets, they will deny your OIC and may go ahead to audit you. The agency compares your application details with their own records, such as bank accounts, real estate holdings, and business assets. Once they find inconsistencies after the comparison, your OIC will be rejected.
What to Do if Your OIC is Rejected
No taxpayer wants a situation where their Offer in Compromise is rejected because it can be discouraging. However, an OIC rejection does not imply that you’ve exhausted all options. In most cases, you can choose to appeal the decision or opt for an alternative resolution after you’ve carefully reviewed why your offer was denied.
Carefully Review the OIC Rejection Letter
Once you receive the rejection letter, read it thoroughly. The letter will indicate the specific reason or reasons your offer was not accepted. Usually, it’d revolve around the reasons we discussed earlier. When you understand why your offer was rejected, it will be easier to figure out what to do next.
Also, keep in mind that in some cases, the IRS may not necessarily reject your offer but instead return it. This may occur if your application was incomplete, lacked required documentation, or if you failed to include the application fee or initial payment. Unlike a rejection, a returned offer cannot be appealed. Instead, you’ll be required to fix the issues that led to the return and reapply.
File an Appeal if You Disagree With the Rejection
In a situation where you strongly believe the rejection was unfair or based on incorrect assumptions by the IRS, you can submit an appeal to the IRS Office of Appeals using Form 13711 (Request for Appeal of Offer in Compromise). The appeal must be made within 30 days of receiving the rejection letter. Make sure you submit a written statement explaining why you don’t agree with the rejection and submit additional documents to support your claims.
The good thing is that while your OIC is under review, the IRS suspends the Collection Statute Expiration Date (CSED). If your offer is rejected, the CSED is also suspended during the 30-day appeal window. Also, once you file an appeal for the rejection, the agency suspends the CSED until it reaches a conclusion regarding your appeal.
Consider an Installment Agreement
If the IRS declines your offer but your finances allow you to pay the full amount over time, opting for an IRS payment plan can be a practical next step. Most taxpayers qualify for a payment plan. Luckily, the eligibility and approval process isn’t usually stringent.
If your current tax liabilities are under $100,000, you can apply for a short-term payment plan, which allows you to pay within 180 days. However, for debts below $50,000, a long-term installment agreement may be a better option as it allows you to spread payments over several years.
Additionally, you can set up a partial payment installment agreement to pay a reduced amount monthly if you cannot afford the full payment but do not qualify for an OIC.
Explore Currently Not Collectible (CNC) Status
Alternatively, you may be eligible for the Currently Not Collectible (CNC) status if you genuinely cannot afford to make any payment. Once you’re approved for CNC status, the IRS pauses all collection actions such as federal tax lien, wage garnishments, or tax levies on your account. To qualify for CNC, you must accurately fill out and submit Form 433-A to prove that your income barely covers your basic living expenses.
Speak With a Tax Professional
Ultimately, the best thing you can do might just be to ask a tax professional for guidance. We understand these IRS tax relief programs can sometimes be confusing, and you don’t want to make mistakes that may disqualify you just because you don’t understand how they work.
That’s why our expert tax attorneys offer a free consultation, available once you reach out, so you can ask questions related to your tax situation and get guidance. Victory Tax Lawyers can review your rejection letter, negotiate with the IRS on your behalf, or help you navigate the technicalities to set up a payment plan to ease the tax burden.
How Hard Is It to Get an Offer in Compromise?
Getting an Offer in Compromise can be quite difficult, though not impossible. According to the IRS 2023 Data Book, the IRS rejected over 57% of the total OIC offers in 2023 (17,453 offers out of 30,163). That means that chances are pretty slim, unless you know the right strings to pull. One of the most effective ways to increase your chances of getting your Offer in Compromise application approved is to work with a tax lawyer.
As a legal professional who specializes in tax matters, a tax attorney understands tax law and can help make sure that your offer is submitted correctly. They handle your documentation process, ensuring that all necessary documents are included at the first contact to avoid delay. In addition, an attorney will craft a compelling statement and an explanatory memorandum. These materials, when combined with your information, give the IRS a clear picture of your financial standing, enabling them to make a prompt decision.
Why Would an OIC Be Accepted?
The IRS accepts an Offer in Compromise (OIC) only if the taxpayer meets one of three conditions: Doubt as to Collectibility, Doubt as to Liability, or a strong reason why paying would cause extreme hardship. These conditions help the IRS determine whether settling the back taxes for less than the full amount is reasonable.
Doubt as to Collectibility
Doubt as to collectibility is one of the most common reasons OICs are accepted. If the IRS believes they are unlikely to ever collect the full amount based on your income, assets, and overall financial situation, they’ll approve your OIC.
In this case, the IRS evaluates whether it’s more practical to collect your Reasonable Collection Potential now rather than having to pursue full collection over many years with no guarantee of recovery. Your application must also clearly show that the offer is equal to or greater than your RCP, and you’ll need to include detailed financials through Form 433-A or 433-B along with Form 656.
Doubt as to Liability
Doubt as to liability applies when there’s a genuine question about whether you actually owe the tax debt in the first place. This could happen if the IRS made a mistake in assessing your taxes or if new information has come to light that wasn’t available when your original return was filed. This type of OIC is far beyond your financial ability to pay; you’ll have to show proof that the amount itself is inaccurate or unfairly calculated.
Effective Tax Administration
If you’re in a situation where you can technically pay your full tax debt, however, doing so may cause serious financial hardship or would not be fair based on what you’re going through, the IRS may accept your OIC. This effective tax administration option is often utilized by taxpayers with situations like a chronic illness, permanent disability, or an elderly taxpayer with a fixed income. ETA also covers other situations where enforcing collection would undermine public confidence in the tax system.
How Do I Get an OIC Approved?
The IRS does not easily approve an Offer in Compromise. However, if you prepare carefully and make efforts to prove financial hardship, you may increase your chances of getting your OIC approved.
- Make sure you’re eligible before applying: Use the IRS OIC Pre-Qualifier Tool or consult a tax attorney to confirm you meet the core requirements. Submitting an offer when you’re not eligible will cause you an instant rejection.
- Get all your past tax returns filed: The IRS won’t consider your OIC if you’re behind on any required filings. See to it that you’re up to date on all past returns, no matter how old the tax return may be.
- Offer an amount based on your financial situation: Your offer must reflect your reasonable collection potential (RCP). Should there be a case where your offer is low, the IRS will reject it.
- Stay cooperative and responsive during the review: You may be requested to send additional documents or clarification. Once you receive the request, respond quickly and keep copies of every document that was sent.
- Submit complete and accurate documentation: Make sure to include Forms 656 and 433-A or 433-B, along with proof of income, expenses, debts, and assets. Missing documents can lead to a denial or return of your application.
- Be prepared to appeal if rejected: If your OIC is denied, don’t be anxious. You have 30 days to appeal using Form 13711. You should also provide a clear explanation, along with any new supporting evidence to back up your claim.
How Long Does the OIC Process Take?
The Offer in Compromise process usually takes over 6 to 12 months. However, you should also know that the review process can last for over two years, depending on how complex your case is and the workload of the agency. Other factors that can make the process shorter or longer include how complete your application is, how quickly you respond to IRS requests, and whether you need to appeal a rejection.
An OIC application goes through several stages, which include:
- Initial review stage: begins once an application is submitted alongside the appropriate supporting documents. This takes about 2-4 weeks.
- Additional information: the IRS may request additional information, like proof of income. This can take around 4-6 weeks.
- Detailed Review: at this stage, the IRS has all they need and is carrying out an in-depth review of your reasonable collection potential. A detailed review will take 6-12 months.
Need Help With Your Offer in Compromise?
If your tax bills feel like a mountain, consider an Offer in Compromise. It might just be the fresh start you need. The bad news, however, is that a large percentage of offers do not make it to the success list, largely because the average taxpayer does not understand IRS collections and tax relief services such as the OIC. But we don’t want you to make mistakes; that’s why we’ve put this guide together for you.
If you want to increase your chances of getting your OIC accepted, it’s best to work with our experienced tax lawyers for professional guidance. From crafting customized OIC strategies to overseeing every case detail, our attorneys at Victory Tax Lawyers are here to guide you through. Begin your path to a brighter financial future today, and let us take on the challenge for you. Schedule your free attorney consultation now.
FAQ
How Can an Appeals Officer Assist in Settling an Offer in Compromise?
An IRS Appeals Officer can review your Offer in Compromise if it was denied and you file an appeal. Their role is to provide an impartial and independent review of your case. They may negotiate a resolution based on your financial situation and help you reach a more favorable outcome than what was originally offered by the IRS collections division.
What Rights Do I Have if My Offer in Compromise Is Returned?
If your OIC is returned, you do not have the right to appeal the decision. However, you do have the right to reapply once you’ve corrected the issue that led to the return. A returned offer doesn’t necessarily imply a denial. In most cases, it could mean that your application was incomplete or didn’t meet basic submission requirements.
