The IRS’s Offer in Compromise (OIC) program offers a way to reduce the total tax debt you owe, often helping individuals and business owners who are struggling financially. The idea is to settle your tax bill for less than the full amount due, but not everyone qualifies. The IRS looks at your financial situation very carefully and may reject or return your offer for several reasons. Understanding these reasons ahead of time can really improve your chances of success. By knowing the pitfalls, you can better prepare your case and avoid having your offer rejected.
Common Reasons the IRS Returns an Offer in Compromise
Before the IRS even considers your OIC, they review whether your submission meets basic requirements. They might return your offer without much review if it’s incomplete or if you don’t meet specific eligibility criteria. Here are the main reasons why the IRS may return your offer before getting into the details.
1. Missing or Incomplete Paperwork
One of the most common reasons offers get returned is because of incomplete paperwork. This is where a lot of people slip up. It’s not enough to just fill out the forms – you need to make sure every section is completed, and that you include all the supporting financial documents that demonstrate your ability or inability to pay. The IRS won’t accept an OIC without seeing your full financial picture, which includes things like bank statements, pay stubs, and property valuations.
- Make sure forms like Form 656 and Form 433-A (OIC) are fully filled out.
- Provide all supporting documents, such as financial records, to back up your claims.
Missing any part of the documentation can lead to delays or outright rejection, so double-check everything before you submit.
2. Not Paying the Application Fees
When submitting an OIC, you’re required to include an application fee and usually an initial payment toward your offer, unless you qualify for low-income status. If you’re offering a lump sum, you’ll need to pay 20% upfront. For installment offers, you’ll need to send the first payment along with your application. If any of these payments are missed or not enough, the IRS will return your offer without even reviewing it. It’s also important to keep up with any required payments while your offer is being considered.
- For lump sum offers, include 20% of your offer.
- For installment offers, send the first monthly payment upfront.
- Make sure to keep making payments on time during the evaluation period.
Failing to do this can easily lead to your offer being sent back, and that’s the last thing you want when dealing with the IRS.
3. Active Bankruptcy
If you’re currently in bankruptcy, the IRS will not consider your Offer in Compromise. This is because the bankruptcy court has jurisdiction over your financial affairs, making it impossible for the IRS to negotiate an OIC. Filing for bankruptcy during the process of your OIC evaluation also freezes everything. The IRS will wait until your bankruptcy case is closed before they will even consider an OIC.
- Bankruptcy takes precedence over any OIC considerations.
- If you plan to submit an OIC, it’s best to wait until your bankruptcy case is fully resolved.
Trying to submit an OIC while dealing with bankruptcy is essentially a waste of time, so it’s better to avoid this step if you’re already in proceedings.
4. Unfiled Tax Returns
Being behind on your tax filings is another big reason the IRS may return your OIC. To even be considered, all of your past tax returns must be filed and up to date. This ensures that the IRS has all the information they need to assess your total tax liability. If you’re missing any filings, the IRS won’t consider your offer until everything is current.
- Ensure that all previous tax returns are filed before submitting an OIC.
- Missing even one tax return could delay the process or cause the offer to be returned.
Before considering an OIC, double-check your filing status to make sure all required returns are submitted.
5. Missing Estimated or Withholding Payments
If you’re self-employed or responsible for making estimated tax payments, you need to be current with those payments before submitting your OIC. For employees, the IRS also checks to make sure enough tax is being withheld from your paycheck. If you’re behind on your estimated or withholding payments, the IRS may return your offer until you’re compliant. It’s important to remember that even after submitting an OIC, you need to continue making these payments to stay in good standing.
- Self-employed individuals must be up to date on estimated tax payments.
- Employees should ensure that their withholding is accurate and sufficient.
Falling behind on these obligations is one of the most easily overlooked reasons offers are returned, so make sure your payments are current and correct.
6. Filing Just to Delay Collections
Submitting an Offer in Compromise solely to stall IRS collections won’t work. If the IRS suspects you’re filing an OIC just to delay enforced collection activities, like wage garnishments or levies, they’ll reject it outright. This could happen if you submit an offer that’s almost identical to a previous one that was already rejected. The IRS wants to see genuine efforts to settle your tax debt, so if they believe you’re just buying time, they won’t take it seriously.
- Submitting an OIC similar to a previously rejected offer will likely be seen as a delay tactic.
- The IRS can see through attempts to use the OIC process to avoid paying or delaying collections.
The best approach is to be upfront and genuine about your financial situation to avoid unnecessary complications.
What to Do if the IRS Returns Your Offer
If your OIC is returned, don’t panic – it’s not necessarily the end of the road. In many cases, the IRS gives you a chance to correct any issues, like missing paperwork or payments, before making a final decision. It’s crucial to act quickly and respond to any requests from the IRS, as delays can lead to your offer being permanently rejected.
- Respond promptly to IRS requests for missing documents or payments.
- If you receive a return letter, contact the IRS to discuss why your offer was returned and whether it can be reconsidered.
If the issues can’t be resolved, you can always resubmit your offer once everything is corrected. But be sure to fully address any deficiencies to avoid running into the same problem again.
Key Reasons the IRS Might Decline Your Offer
Submitting an Offer in Compromise (OIC) to the IRS can seem like a great way to tackle your tax debt, but just because you qualify doesn’t mean it’s a guaranteed yes. The IRS looks closely at each offer, and even if it meets the basic requirements, there are several reasons they might reject it. Let’s break down the most common reasons for a rejection.
1. The IRS Believes You Can Pay More
One of the biggest hurdles in getting an OIC approved is proving to the IRS that you genuinely can’t pay more than what you’re offering. When the IRS reviews your OIC, they’ll carefully assess your financial situation, including your income, living expenses, and any assets you own, like property or investments. If they conclude that you have the ability to pay more than what you’re offering—even if it’s just a little—they’re likely to reject the offer.
The IRS doesn’t reject your offer without communication. They’ll usually try to call you before sending a formal rejection notice. During that call, they’ll explain how they arrived at their decision and give you the chance to provide more financial information if you think they’ve overlooked something. This is where working with a tax professional can be really helpful—sometimes a deeper dive into your finances can reveal details that could change the IRS’s mind.
2. Not in the Best Interest of the Government (NIBIG)
Even if your offer seems reasonable, the IRS may reject it because they don’t believe it’s in the government’s best interest to accept it. This type of rejection, referred to as “NIBIG” (Not in the Best Interest of the Government), requires approval from a manager within the IRS, like a Territory or Operations Manager.
Here are some scenarios where NIBIG might apply:
- You’ve consistently failed to report your income accurately or pay your taxes in the past, showing a pattern of noncompliance.
- You were involved in a refund scheme, such as submitting false W-2s or claiming credits you weren’t entitled to, resulting in a fraudulent refund.
- You’re facing penalties for misconduct related to tax preparation or promoting abusive tax schemes.
In these situations, the IRS might decide that accepting your offer would set a bad precedent or reward poor tax behavior, which they want to avoid.
3. Public Policy Considerations
In certain cases, the IRS could reject your OIC based on broader public policy concerns, even if your financial situation suggests you can’t pay the full tax amount. These rejections are less common but happen when the IRS believes that accepting the offer could negatively impact public confidence in the tax system.
For example, the IRS might reject your offer if:
- You’ve publicly encouraged others to ignore tax laws or avoid paying taxes, and you continue to promote this type of behavior.
- There’s evidence that you’re involved in ongoing criminal activity or have hidden income from illegal activities, making it clear that accepting your offer would send the wrong message.
These situations are more extreme but highlight the fact that the IRS not only evaluates your ability to pay but also considers the broader implications of accepting your offer.
4. Doubt as to Liability (Disagreement Over the Amount Owed)
Sometimes, taxpayers submit an Offer in Compromise not because they can’t afford to pay, but because they believe the IRS has made a mistake in calculating how much they owe. This type of offer is called a “doubt as to liability” (DATL) offer. Essentially, you’re arguing that the IRS’s assessment is wrong.
However, the IRS is likely to reject these offers if they believe the amount owed is accurate. If they’ve already reviewed your account and made any necessary adjustments, and you still refuse to withdraw your offer, they’ll usually turn it down.
That being said, if you genuinely believe there’s an error, it’s worth fighting for. But keep in mind, you need solid evidence and documentation to back up your claim.
Appeal Rights. If the IRS rejects your OIC, you don’t have to accept it as the final word. You can file an appeal with the Independent Office of Appeals. After receiving a rejection letter, you’ll have 30 days to submit your appeal, and the letter will include details about the appeal process. This is your opportunity to argue your case further, so it’s essential to act promptly and gather any additional information that supports your position.
Steps to Improve Your Chances of Offer in Compromise Approval
The Offer in Compromise program can provide significant relief if you’re struggling with tax debt, but getting your offer accepted requires careful preparation. To increase your chances, it’s crucial to understand why the IRS might reject your offer and take steps to avoid those pitfalls.
Here are some tips to improve your odds:
- Ensure Accuracy and Completeness: Double-check all your financial information before submitting your OIC. Inaccurate or incomplete information can easily lead to rejection.
- Stay Compliant: The IRS is more likely to accept your offer if you’ve been compliant with your tax obligations recently. Make sure you’ve filed all required tax returns and are keeping up with any current payment obligations.
- Offer a Reasonable Amount: While it’s tempting to offer a low amount, the IRS will scrutinize your ability to pay. Make sure your offer is realistic based on your financial situation.
- Work with a Tax Professional: Navigating the OIC process can be complicated, and even small mistakes can lead to rejection. A tax resolution firm like Austin & Larson Tax Resolution has the experience and expertise to guide you through the process, ensuring you submit the strongest possible offer.
Ultimately, honesty, thoroughness, and strategic planning are key to getting your offer accepted. By taking the time to prepare a solid submission, you’ll improve your chances of reaching a favorable agreement with the IRS.
Summary: Why Offers in Compromise Are Rejected
Navigating the IRS Offer in Compromise process can be challenging, but understanding why offers are rejected is crucial for increasing your chances of success. The key is to avoid common mistakes like incomplete paperwork, missed payments, and tax non-compliance. By staying informed, organized, and proactive, you can significantly improve your chances of settling your tax debt for less than what you owe.
If you’re unsure about your OIC submission or need professional help, don’t hesitate to reach out. Contact Austin & Larson Tax Resolution to guide you through the complex OIC process. Our team will ensure your offer is properly prepared and stands the best chance of being accepted.
Key Takeaways:
- Complete all paperwork thoroughly, including Form 656 and Form 433-A (OIC).
- Be up to date on tax filings and estimated payments before submitting your OIC.
- Make sure you include all required fees and initial payments with your offer.
- Avoid submitting offers solely to delay collections—this can hurt your case.
- If your offer is returned, act quickly to resolve any issues.
- The IRS may reject offers due to your financial ability to pay more or concerns about public policy.
- You have the right to appeal if your OIC is rejected.
Frequently Asked Questions
1. What is an Offer in Compromise (OIC)?
An OIC is an agreement between a taxpayer and the IRS to settle tax debt for less than the full amount owed, typically when paying the full amount would cause financial hardship.
2. Who qualifies for an Offer in Compromise?
You may qualify if you can’t pay your tax debt in full, have filed all required tax returns, and are up to date with estimated or withholding tax payments.
3. What are the chances of my OIC being accepted?
Acceptance rates vary depending on your financial situation. The IRS evaluates whether the amount you offer is the most they can reasonably collect from you.
4. Why would the IRS reject my Offer in Compromise?
The IRS may reject your offer if they believe you can afford to pay more, your paperwork is incomplete, or if there are public policy concerns.
5. Can I submit an OIC if I’m in bankruptcy?
No, the IRS won’t consider your Offer in Compromise if you are in active bankruptcy proceedings.
6. What happens if my OIC is rejected?
You have the option to appeal the decision, providing additional information to support your offer. Alternatively, you can correct the issues and resubmit the offer.
7. Do I need to pay anything upfront when submitting an OIC?
Yes, you’ll need to pay an application fee and, in most cases, make an initial payment toward the offer, unless you qualify for low-income status.
8. Can I negotiate my tax debt directly with the IRS?
Yes, you can negotiate on your own, but it’s often beneficial to have a tax professional like Austin & Larson Tax Resolution handle the process to avoid common mistakes.
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