If your Offer in Compromise (OIC) is rejected by the IRS, it can feel discouraging, but you still have options. Understanding why the offer was rejected and how to proceed can empower you to pursue alternative solutions for addressing your tax debt. Here’s a detailed guide on what to do if your OIC is denied, including appealing the decision, reapplying, and exploring other tax relief options.
OICs: Returns vs. Rejections
First, it’s important to understand if your offer in compromise was returned or rejected by the IRS. Knowing the difference will help you understand your options.
OIC Return
An OIC return happens when the IRS declines to even review the offer due to non-compliance with eligibility requirements or application procedures. A returned OIC can be resubmitted once you resolve the compliance issues. Here are some of the most common reasons for an OIC return:
- You didn’t pay the application fee and don’t qualify for the low-income fee waiver
- You recently submitted a similar offer, which was rejected.
- You filed for bankruptcy
- You opted for the periodic payment plan but didn’t stay current with monthly payments.
- The IRS deemed your offer frivolous or intended only to delay collections.
- You accumulated additional tax debt while your offer was under review.
- You had other tax compliance issues.
- You didn’t provide additional information requested by the IRS within 14 days.
OIC Rejection
An OIC rejection occurs after the IRS reviews your financial information and determines that your offer does not meet the criteria based on their assessment of your reasonable collection potential. A rejection signifies that the IRS evaluated your case but believes you could pay more than what was offered. Here are some of the most common reasons for an OIC rejection:
- Your offer was too low, and the IRS believes you can afford to pay more.
- You have the ability to pay your tax bill in full or make monthly payments.
Understand Why Your OIC Was Rejected
Before moving forward, review the IRS’s reasoning for the rejection. This information can be found in the rejection letter you receive. Common reasons for rejection include:
- Insufficient Offer Amount: The IRS may believe your offer is too low based on your ability to pay.
- Incomplete or Incorrect Documentation: Missing forms, inaccurate information, or incomplete financial statements can lead to rejection.
- Failure to Meet Eligibility Requirements: The IRS has strict requirements for OIC eligibility, including being up to date on filing current tax returns and making any required estimated tax payments.
Understanding why your OIC was rejected will help you make informed decisions on how to proceed.
Appeal the OIC Rejection
If you believe the IRS made an error in rejecting your OIC, you have the right to appeal the decision within 30 days of receiving the rejection notice. This appeal process involves submitting Form 13711, Request for Appeal of Offer in Compromise, and explaining why you disagree with the decision. When preparing your appeal, consider the following steps:
- Gather Supporting Documentation: Provide additional financial statements or updated information to clarify your financial situation. This could include bank statements, pay stubs, and proof of expenses.
- Write a Strong Statement of Your Case: Be clear and concise, explaining why the IRS should reconsider your offer. Highlight any financial hardships, including medical expenses, unexpected income loss, or other financial obligations that limit your ability to pay.
- Seek Professional Help if Needed: Tax professionals experienced with OIC appeals can be valuable in guiding you through the appeals process. Their knowledge of IRS requirements and processes can help strengthen your case.
The IRS Office of Appeals will review your appeal, and if successful, your OIC may be reconsidered. If the appeal is unsuccessful, you still have other avenues to address your tax debt.
Reevaluate and Submit a New Offer in Compromise
If appealing is not an option or the appeal is denied, you can consider submitting a new OIC application. Reapplying is a viable option, particularly if there have been significant changes in your financial situation. If your income, expenses, or assets have changed, update your financial statements and supporting documentation accordingly. This is especially important if you’ve experienced job loss, increased medical bills, or other financial burdens.
If the IRS rejected your initial OIC because they believed the offer was too low, consider increasing the amount to something closer to the IRS’s assessment of your reasonable collection potential (RCP). The RCP is the IRS’s estimate of how much you can realistically pay based on your income and assets. Do not submit the same offer. This could leave to a $5,000 penalty with the IRS.
The IRS considers three types of OICs: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. If your circumstances have changed, you may be eligible to apply under a different type of OIC. Submitting a new OIC can be a fresh opportunity if your financial circumstances have shifted or if you’re able to increase the offer.
Explore Alternative Tax Relief Options
If an OIC is no longer feasible, there are alternative options that can help manage your tax debt.
Installment Agreement
An Installment Agreement allows you to pay your tax debt in monthly installments over time. If you cannot pay your tax debt in full, an installment plan is often more manageable than a lump-sum payment. You can apply for different types of installment plans, such as:
- Guaranteed Installment Agreement: Available if you owe $10,000 or less and can pay it off within three years.
- Streamlined Installment Agreement: Available for debts up to $50,000, with payments spread over a maximum of 72 months.
- Non-Streamlined Installment Agreement: If you owe more than $50,000, you may still qualify for an installment agreement, but additional financial disclosures will be required.
- Partial Payment Installment Agreement (PPIA): This allows you to pay a reduced amount monthly if you cannot afford the full payment but do not qualify for an OIC.
Currently Not Collectible (CNC) Status
If you’re experiencing financial hardship and cannot afford to make payments, you may qualify for Currently Not Collectible (CNC) Status. CNC temporarily halts IRS collection efforts, including wage garnishments and levies, until your financial situation improves. Keep in mind that CNC status is typically reviewed annually, so if your financial situation changes, the IRS may reassess your ability to pay.
Penalty Abatement
In some cases, the IRS may agree to reduce or waive certain penalties through Penalty Abatement if you have reasonable cause. Common reasons for penalty abatement include serious illness, natural disasters, or other circumstances beyond your control. Applying for penalty abatement can reduce your overall tax liability, making it easier to pay off the debt.
Bankruptcy
While typically considered a last resort, bankruptcy may discharge certain types of tax debts under specific conditions. Taxes eligible for discharge include income tax debt that is at least three years old, filed at least two years prior, and assessed more than 240 days ago. Bankruptcy should only be considered after consulting with a legal or financial professional who can help assess your eligibility and the consequences of filing.
Keep Up with Current Tax Obligations
One of the most important things you can do while working to resolve a past tax debt is to stay current with all new tax obligations. To remain compliant with IRS requirements, file all required tax returns. Ensure all previous and future tax returns are filed on time. If you are self-employed, make quarterly estimated tax payments to avoid additional debt and penalties. Meeting your current obligations shows the IRS you’re serious about resolving your tax issues, which may make them more receptive to future OICs or other relief options.
Seek Professional Help
Addressing a rejected OIC and exploring alternative solutions can be complex. Hiring a tax professional, such as a certified public accountant (CPA), enrolled agent, or tax attorney, can be beneficial. A professional can help identify additional deductions or credits, evaluate your income sources, and help find the most favorable option. Tax professionals experienced with IRS negotiations can help you submit a new OIC, apply for an installment agreement, or request CNC status. Submitting complete and accurate documentation can make a significant difference in the success of your application, appeal, or alternative solution.
Tax Help for Rejected OICs
A rejected Offer in Compromise doesn’t mean you’re out of options for managing tax debt. By understanding why the IRS rejected the offer, considering an appeal, exploring alternative solutions like installment agreements or CNC status, and staying compliant with current tax obligations, you can still work toward financial resolution. With persistence and, if needed, professional guidance, you can find a viable path to address your tax debt and alleviate the burden of IRS collections. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
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