IRS Reject Your Offer in Compromise? When and How to Appeal
The IRS offer in compromise (OIC) is an understandably popular tax payment option because it allows taxpayers to settle their tax debts for less than they owe. Unfortunately, most taxpayers who submit an OIC to the IRS get denied. If this happens to you, you have several options, such as filing an appeal or applying for a different relief program. However, what you should do depends on the basis for requesting an OIC and the IRS’ reason(s) for refusing to accept your offer.
The following is an overview of what you can do in these situations. Before getting into that discussion, we need first to discuss the different ways in which the IRS can deny an OIC.
Different Ways the IRS Can Refuse Your OIC
When you submit your OIC to the IRS, there are three possible outcomes: acceptance, rejection, and returned as not processable.
The first one is self-explanatory. If the IRS accepts your OIC proposal, you pay the offer within the agreed-upon time frame. Then, as long as you stay compliant with your filing and payment obligations for the next five years, the IRS will allow the settlement to stand.
But if the IRS rejects your OIC, it means the IRS didn’t believe you qualified for acceptance. For example, they might think you have the financial resources to pay back your full tax balance and therefore, should request a different form of arrangement, such as a payment plan.
If the IRS returns your OIC, it means your OIC application wasn’t properly submitted. As a result, the IRS returns your OIC application to you without analyzing the merits of your OIC request. The IRS may return your OIC as not processable for various reasons, such as:
- You didn’t include the initial payment with the OIC.
- You’ve filed for bankruptcy.
- You haven’t made all required estimated tax payments for the year (if applicable) or filed all required tax returns.
- You didn’t include an application fee (or the correct amount for the application fee)
- The IRS referred your case to the U.S. Department of Justice, possibly for criminal charges of tax evasion.
What to Do if Your OIC Gets Returned
Having your OIC returned because the IRS deems it not processable is both good news and bad news. The bad news is that it’s common for the IRS to return OICs to taxpayers for technical deficiencies.
For example, if you forgot to include a certain document, the IRS has traditionally put your OIC on pause and then sent you a letter asking for the missing document. Now, the IRS is more likely to return your whole OIC and ask you to resubmit it with the correction or missing information. This is understandably frustrating, especially given how it can delay your tax relief.
The good news is that having a returned OIC doesn’t mean the IRS disagrees with the merits of your request. Once you address whatever error or deficiency the IRS found, you can resubmit your OIC. In case you’re wondering, you can’t appeal the IRS returning your OIC. But if you’re a self-employed individual or small business, you can ask the IRS to reconsider its return of your OIC by calling the phone number listed on the IRS letter that accompanied your returned OIC. You must make this call within 30 days from the date of the letter.
If you didn’t get the help of a tax professional with your first submission, strongly reconsider continuing the OIC process on your own. It’s nice to have someone with experience handling OICs to examine your request and not only confirm the IRS will accept it for processing, but that your reasons for the OIC are sound and likely to be accepted.
The only thing more frustrating than having an OIC returned because you forgot to include something is to have an otherwise acceptable OIC rejected because you didn’t provide the best information and support possible for acceptance.
What You Can Do if the IRS Rejects Your OIC
If the IRS rejects your OIC, you have three main options:
- Appeal the rejection,
- Submit a new OIC for a different reason, or
- Consider another tax debt settlement solution.
The best option for you depends on your unique situation and the reasons the IRS provided for rejecting your OIC. The IRS should list these reasons in the letter they send you informing you of the OIC rejection.
In the majority of cases, the IRS will reject your OIC if they believe your offer was too small and that they can get more money by trying to collect the tax debt using methods other than the OIC. In these situations, the IRS should reach out and ask you to submit a higher offer.
Your OIC may also be rejected if the IRS believes it’s been submitted with fraudulent intent or to delay the IRS’ tax collection efforts, although in most cases, this will lead to the OIC being returned rather than rejected.
If your OIC was based on effective tax administration or doubt as to liability, a rejection would likely be due to the IRS disagreeing with your arguments about how collecting the tax would be unfair or your belief as to the invalidity of the outstanding tax balance. However, these represent the minority of OIC rejections.
Filing an Offer in Compromise Appeal
If you decide to file an appeal, you’ll need to act quickly, as you’ll have 30 days from the date of the OIC rejection letter to file your appeal. Your appeal starts with filling out IRS Form 13711, Request for Appeal of Offer in Compromise.
You don’t have to use this form and can instead send a letter to the IRS, but your letter will need to include:
- Your name, address, daytime phone number, and tax ID.
- A copy of your OIC rejection letter.
- Identification of the tax years in question.
- A statement officially stating that you want to appeal the IRS’ rejection of your OIC to the IRS Independent Office of Appeals (Office of Appeals).
- A list of the specific reasons you’re disagreeing with the IRS and why you believe the IRS is wrong.
- Documents that support your reasons for disagreeing with the IRS.
- Legal authority, if any, that would support your position.
- Any additional information you want the IRS to consider.
- Your signature affirming that the information you’re submitting is correct, true, and complete, under penalties of perjury.
This is the same information that should be included on Form 13711. The goal of sending this letter (or completing Form 13711) is to set up an appeals conference with the Office of Appeals. These conferences are informal and can take place by phone, video conference, in-person, or by correspondence.
If you decide to file an appeal, it’s strongly recommended that you first talk to a tax professional. See if they can help you establish the strongest arguments for the appeal and even represent you during the appeals process. Getting their help isn’t required, but can easily make the difference between success and failure.
Imagine the IRS rejected your OIC because they believed your offer was too low. If you disagree with this, you’ll have to explain, in detail, why the IRS was wrong. Simply putting on Form 13711, “I don’t have the money to increase my offer” won’t cut it. In this type of OIC rejection, the IRS should have provided you with an Income/Expense and Asset/Equity Table with your OIC rejection letter.
This table reflects what the IRS believes to be your financial situation. Carefully review this table and identify numbers you not only believe the IRS got wrong, but you have the evidence to prove why and how. For instance, the IRS might have attributed $3,000 in monthly income to you, but you only earn $2,000 per month. In this case, you’ll want to not just identify this discrepancy, but provide copies of recent paystubs for support.
Or maybe the IRS believes you own real estate valued at $50,000, but it turns out it’s only really worth $20,000. You’ll need to attach one or more appraisals to support this position.
It may not always be obvious which arguments you need to make to the IRS or the ways you can support your arguments. Yet someone with experience submitting OICs to the IRS and appealing OIC rejections can be invaluable in helping decide if an appeal would be possible and if so, the best way to go about doing it.
Other OIC Rejection Alternatives
Generally speaking, if you submit an OIC on the basis of doubt as to collectibility, the IRS will only accept your offer if it’s greater than or equal to your reasonable collection potential (RCP). In essence, your RCP represents your assets and income (both present and future), less your basic living expenses.
In cases where your RCP is greater than your offer, it’s unlikely the IRS will accept your OIC, unless your request is based on other reasons, such as effective tax administration or doubt as to liability.
If this applies to you, don’t lose hope, as there are other options available. First, there’s setting up a payment plan or installment agreement to pay your tax debt over time. If the IRS rejects your OIC due to your financial health, chances are good that the IRS will be willing to set up one of these pay-over-time plans.
There’s even a chance that you could be eligible for a partial payment installment agreement, which offers the possibility of settling your tax debt for less than what you owe after making a series of payments over a period of time. There are other possibilities for dealing with your tax debt, such as:
A final option is submitting a new OIC to the IRS for a different reason. If your first OIC was based on doubt as to collectibility, it’s possible that you could be eligible for one of the other two reasons that the IRS accepts an OIC: doubt as to liability and effective tax administration. Just keep in mind that these are less commonly used reasons for an OIC and can be a bit more nuanced in how tax law and your circumstances can support your request.
If you decide to try again with an OIC for one of these two reasons, you are strongly advised to first get the help of a tax professional, in particular, one with extensive experience handling OICs.
Need Help With an Offer in Compromise?
Whether you’re presenting an OIC to the IRS for the first time, resubmitting a returned OIC, or appealing one that’s been rejected, you should get the help of tax professionals, like those found at Seattle Legal Services, PLLC. We have years of experience helping taxpayers settle their tax debts using an offer in compromise and advising them on other tax settlement programs. If you need help appealing an OIC or want to learn about other ways to get rid of your tax debt, contact us for a free consultation. You can reach us online or by calling 425-428-5262.