How to Reconsider a Denied Offer in Compromise: Next Steps and Documentation

Immediate steps to take after a denial

1. Read the denial letter carefully. The IRS denial letter will state the reason(s) your OIC was rejected and will usually include deadlines and instructions for next steps. The letter is your roadmap: it can tell you whether to request reconsideration or file an appeal and how long you have to act.

2. Preserve and organize your file. Make a single folder (digital and/or paper) containing the denial letter, your original Form 656 (and any supporting schedules), bank statements, pay stubs, asset valuations, correspondence with the IRS, and any receipts that back up your expenses.

3. Note deadlines exactly. Denial letters often include a deadline for requesting an appeal or seeking reconsideration. Missing a deadline can limit your options. If the letter doesn’t list deadlines, contact the number on the letter or your assigned settlement officer immediately.

Reconsideration vs. appeal: which path fits your case?

• Reconsideration: This is the faster, document-driven path. You or your representative provide new or corrected evidence to the same IRS office that denied the OIC, asking the settlement officer to re-evaluate the decision. Reconsideration works best when the denial stems from incomplete or inaccurate financial information (for example, previously unreported medical expenses, recent job loss, or understated living costs).

• Appeal: If the denial stems from a legal or valuation dispute (for example, the IRS misapplied OIC rules or disagreed about the value of assets), you may request an administrative appeal with the IRS Office of Appeals. Appeals are a formal process and can take longer.

Refer to the IRS Offer in Compromise page for procedural details and contact points: https://www.irs.gov/payments/offer-in-compromise

How to prepare a strong reconsideration package

A reconsideration package should be concise, well-documented, and directly tied to the denial reasons. Below is a prioritized checklist.

Essential documents to include

• The IRS denial letter (copy) with a short cover letter that states you are requesting reconsideration and summarizes the new evidence.
• Updated Form 656 (if you are re-submitting) or a clear summary of changed facts.
• Complete bank statements for the period referenced by the denial.
• Recent pay stubs, Social Security statements, or proof of other income sources.
• Proof of unavoidable living expenses: rent/mortgage statements, utility bills, childcare or dependent care receipts, insurance premiums.
• Medical and dental bills, proof of health insurance premiums, or documentation of extraordinary medical expenses.
• Proof of unemployment, reduced hours, or business downturn (termination notices, profit/loss statements, bank deposit trends).
• Asset documentation and valuations: vehicle titles with mileage and trade-in valuations, recent appraisal reports for real estate, statements for brokerage accounts, retirement account balances (note: certain retirement accounts may be excluded from lien and levy but often count as equity for OIC purposes).
• Documentation of priority debts and unavoidable obligations (court-ordered payments, child support, recent bankruptcy filings).

Optional but helpful items

• A month-by-month cash-flow statement that reflects real, verifiable expenses rather than IRS allowance tables alone.
• Third-party letters (attorney, social worker, employer) that substantiate changed circumstances.
• Photographs or receipts that show costs (e.g., a disabled-family-member care expense).

Practical tip from practice: I’ve found that a single well-organized binder with tabbed sections (Income, Assets, Expenses, Medical, Other) speeds the settlement officer’s review and reduces follow-up requests.

Common denial reasons and how to address them

1. The offer amount is too low relative to collectible equity: Provide up-to-date asset valuations or acceptable explanations for lower-than-expected equity (e.g., liens, recent necessary repairs).

2. Failure to disclose income or assets completely: Submit bank records, 1099s, and third-party evidence showing the correct amounts. Explain any timing differences or one-time deposits.

3. Expenses are higher than what you reported: Provide receipts, invoices, or canceled checks. If you have nonstandard expenses—unreimbursed medical costs, care for dependents, business losses—document them clearly.

4. Ability to pay during the collection statute period: If the IRS believes you can pay the balance within the collection period, demonstrate why you cannot (employment change, major medical event, or realistic cash-flow projections).

How the IRS evaluates new evidence

The settlement officer will compare your newly submitted documents against IRS valuation tables and their prior analysis. They will ask three questions:

1. Have you shown an actual, verifiable change in financial circumstances?
2. Does the new evidence reduce collectible equity or repayment ability?
3. Is the new information credible and documented?

If the officer determines the new facts change the previous conclusion, the OIC can be reopened and accepted. If not, the denial may be sustained and you’ll receive instructions for appeals.

Timing and expectations

Processing times vary. Reconsideration can sometimes be resolved in a few months if the documentation is straightforward; appeals can take longer. There is no fixed national timeline because complexity and IRS workload differ by location and case. Always ask the settlement officer for an expected response timeframe and follow up in writing.

When to consider alternatives instead of reapplying

If reconsideration is unlikely to succeed, consider acceptable alternatives:

• Installment Agreement: Structured monthly payments that may be easier if your ability to pay is temporary.
• Currently Not Collectible (CNC) status: If your financial situation makes you unable to pay any amount, the IRS may temporarily pause enforced collection.
• Bankruptcy: In rare cases, bankruptcy can discharge certain tax debts; consult a bankruptcy attorney.

See our comparison of OIC and alternatives for details: https://finhelp.io/glossary/installment-agreements-vs-offers-in-compromise-which-is-right-for-you/

How a professional can help

A CPA, enrolled agent, or tax attorney can:

• Identify whether the denial was driven by fact, valuation, or legal interpretation.
• Assemble and translate financial documents in IRS-friendly terms.
• Negotiate directly with the settlement officer and, if necessary, prepare an appeal brief.

From my experience advising 500+ clients, cases where the denial resulted from missing or incomplete expense documentation tend to have the highest success rate on reconsideration—provided the new evidence is clear and current.

Examples (brief, anonymized)

• Medical-expense example: A sole-support parent’s offer was denied because the officer used standard IRS living allowances. We provided pharmacy records and hospital bills showing $12,000 in unreimbursed medical costs for the taxpayer’s child; the IRS reopened and accepted a lower settlement amount.

• Business-loss example: A small business owner’s income projections were used against them. We submitted bank statements showing sharply reduced revenue after a natural-disaster event and a city-issued work-stoppage declaration. The reconsideration resulted in an adjusted, acceptable offer.

Common pitfalls to avoid

• Re-submitting the same, unsupported statements without new documentation.
• Waiting too long or missing appeal deadlines noted in the denial.
• Ignoring asset valuations (vehicles and real estate) or assuming retirement accounts are always excluded.
• Not communicating in writing—always document phone conversations and confirm key points by letter or email.

Useful resources

• IRS Offer in Compromise: https://www.irs.gov/payments/offer-in-compromise
• Instructions for Form 656 and tips: https://finhelp.io/glossary/instructions-for-form-656-offer-in-compromise/
• What to include in a financial disclosure for OIC: https://finhelp.io/glossary/what-to-include-in-a-financial-disclosure-for-an-offer-in-compromise/

Final checklist and next steps

1. Read the denial letter and calendar any deadlines.
2. Gather and organize new documentation targeted to the denial reasons.
3. Decide whether to request reconsideration with the settlement officer or file an appeal with IRS Appeals.
4. Consider alternatives (installment agreement or currently not collectible) if reconsideration is unlikely.
5. Engage a qualified tax professional if the facts are complex.

Professional disclaimer: This article is educational and not individualized tax or legal advice. Tax rules change; consult a qualified tax professional (CPA, enrolled agent, or tax attorney) and check the IRS for current forms and instructions before acting.