Background

The IRS established the Appeals process to resolve tax disputes without litigation and to consider equitable settlements, including Offers in Compromise. Over the past decade I’ve seen Appeals show more structured scrutiny of financial disclosures and greater emphasis on up-to-date documentation, especially after economic shocks. Appeals officers follow IRS policy and priority tests that focus on whether collection of the full tax is realistic.

How Appeals Officers Review an Offer (Step-by-step)

  • Initial completeness check: The file is reviewed for required forms and supporting documents. Missing or mismatched documents commonly trigger delays or denial. The Offer in Compromise form and required financial statements must be complete and consistent with supporting records (IRS guidance, OIC instructions).
  • Verification of compliance: Appeals confirms current filings and payments. If a taxpayer is not filing or is behind on estimated tax payments, the offer can be disqualified or deferred until compliance is restored (IRS OIC rules).
  • Calculating reasonable collection potential (RCP): Appeals estimates what the IRS could collect through enforced collection (liquidating assets, levying wages, or future income). RCP generally reflects equity in assets plus projected future income after allowed living expenses. An offer lower than RCP must be justified by special circumstances.
  • Consideration of special circumstances: Serious medical bills, unemployment, natural disaster losses, or other extraordinary expenses can reduce expected collection and make a lower offer acceptable. Taxpayer statements should be supported with contemporaneous documentation.
  • Weighing cost and risk of collection: Appeals balances the practical cost and time of collection against the offered amount. If collection is likely to be time-consuming, costly, or impossible (e.g., taxpayer nearing expiration of the collection statute), an offer may be favored.
  • Final determination and possible negotiation: Appeals can accept, reject, or return the offer for additional documentation. Officers sometimes negotiate adjustments, especially where assets are borderline or where a structured payment option is feasible.

Practical Considerations I Use in Practice

  • Provide full, verifiable records: bank statements, pay stubs, signed third-party statements, medical bills, and documentation showing job loss or income reduction. Incomplete files are the most frequent reason for denial.
  • Build a realistic offer around RCP: Use conservative valuations for assets and realistic projections for future income. Overly optimistic forecasts for future hardship weaken credibility.
  • Choose the right payment option: A lump-sum cash offer (paid within 5 months) is weighted more favorably in some cases. Partial-payment periodic offers require projections and ongoing compliance.
  • Be proactive about compliance: File late returns and get current on required estimated payments before or during the OIC process; Appeals will check this.
  • Communicate clearly and promptly: Respond to requests quickly. Delays often look like obstruction and reduce negotiating flexibility.

Real-world example (illustrative)

A client with $50,000 of assessed tax had escalating medical bills and no nonexempt assets. By documenting medical debt, verifying reduced household income, and proposing a $5,000 lump-sum offer consistent with the calculated RCP, Appeals accepted the offer. The decisive factors were verifiable hardship and a low realistic RCP compared to the total liability.

Who is Affected and Who Qualifies

Individuals and small-business taxpayers with insufficient assets and future income to pay their full liability are typical candidates. Appeals also considers whether taxpayers have made a “best efforts” claim for collection alternatives. Certain disqualifiers—recent bankruptcy discharge status, noncompliance with filing obligations, or suspected fraud—will prevent acceptance (see IRS OIC criteria).

Common Mistakes and Misconceptions

  • Submitting incomplete or inconsistent financial statements.
  • Expecting sympathy without documentation — Appeals relies on evidence, not anecdotes.
  • Underestimating the effect of non-wage income (rental, investment) on RCP.
  • Thinking negotiation means arbitrary reductions; Appeals follows policy and the RCP framework.

Timing

Processing times vary. Many straightforward OICs are resolved in roughly 6–12 months; complex cases or those requiring appeals-level review can take longer. Prompt responsiveness to Appeals’ requests shortens timelines (IRS processing notes).

What to Do If an OIC Is Rejected

  • Request reconsideration or file an appeal of the Appeals-level decision per IRS procedures. If you remain entitled to challenge the decision, consider the documentation gaps identified and address them specifically. See our guide on appealing OIC denials for next steps and timing: “How to Appeal an Offer in Compromise Rejection and Next Steps”.

Professional Tips (Quick Checklist)

  • Verify all tax returns are filed and current.
  • Assemble 12–24 months of bank statements and proof for large expenses.
  • Use conservative asset valuations and realistic living-expense allowances.
  • Consider professional representation if your case includes complex assets or disputed valuations.

Related resources on FinHelp

Authoritative sources and further reading

Professional disclaimer

This article is educational and based on general patterns I’ve observed in practice. It is not individualized legal or tax advice. For case-specific guidance, consult a qualified tax professional or an enrolled agent.