Immediate context and why this matters

When the IRS rejects your Offer in Compromise (OIC) it does not erase your tax liability or stop collection activity unless the rejection letter says otherwise. The IRS typically rejects an OIC when its financial analysis indicates the agency can collect the tax owed through wage garnishment, levies, liens, or payment plans. The rejection is not the end of the road—there are structured legal and administrative options you can pursue to protect assets and manage the balance due.

(Authority: IRS — Offer in Compromise, About Form 656) — https://www.irs.gov/individuals/offer-in-compromise and https://www.irs.gov/individuals/about-form-656

Common reasons the IRS rejects an OIC

  • The IRS calculates your future ability to pay is higher than your offer (ability-to-pay/doubt as to collectibility).
  • Missing or incomplete documentation (pay stubs, bank statements, proof of necessary expenses).
  • Incorrectly valued assets or unreported cash reserves.
  • The type of relief you’re proposing doesn’t match the IRS criteria (e.g., trying to use effective tax administration when other remedies exist).

Understanding the specific reason the IRS rejected your OIC is the first and most important step. The rejection letter will usually list the reason or point to documents that were insufficient.

First 30 days: read the letter, preserve deadlines, and prepare

  • Read the rejection letter carefully. It will include a deadline to respond or appeal—most OIC appeals must be filed within 30 days of the date on the rejection letter. Note the exact deadline and the contact information for the Appeals Office or Collection office handling your case. (IRS guidance: Offer in Compromise pages and appeals procedures.)
  • Do not ignore collection notices. The IRS can resume collection activities after an OIC rejection.
  • Gather documentation that addresses the IRS’s stated reasons for denial: pay stubs, bank statements, medical bills, child-care expenses, retirement accounts, and evidence of unusual or non-discretionary expenses.

Option 1 — File an appeal (administrative review)

If you believe the IRS made an error in evaluating your financial condition or misapplied the rules, file an appeal. The appeals process lets an independent IRS Appeals Officer review the case. Generally:

  • File a formal appeal using the instructions in your rejection letter (many taxpayers use Form 13711, “Request for Appeal of Offer in Compromise,” or contact the Appeals Office named in the notice).
  • Explain, with supporting documents, why the IRS’s calculations were incorrect and provide new or clearer evidence.
  • Appeals can take several months. While they’re pending, collection may be paused depending on circumstances—confirm this with the Appeals Office.

Filing an appeal is often the strongest next step when the rejection is based on miscalculated income or missing documentation. In my practice I’ve seen appeals succeed when overlooked non-discretionary expenses (medical care, court-ordered payments, or custody costs) were documented and presented clearly.

(Authority: IRS, Offer in Compromise)

Option 2 — Revise and resubmit your OIC

If the IRS denial cites missing information or an offer that’s too low, you can withdraw and resubmit a new OIC or revise the existing submission. Practical steps:

  • Correct and expand your financial worksheets (Form 656 and the associated financial statements such as Form 433-A/433-B or Form 433-F).
  • Re-value assets with appraisals where appropriate (real estate, vehicles, business assets).
  • Increase the offer amount only if it still represents the most you can reasonably pay—overstating payment capacity can lead to later default or collection.

Resubmitting makes sense when the primary problem was documentation or valuation. Use the resubmission to address specific denial reasons listed by the IRS.

Internal resource: See our guide on preparing proof of income and strengthening your package: “How to Prepare Proof of Income for an Offer in Compromise Application” — https://finhelp.io/glossary/how-to-prepare-proof-of-income-for-an-offer-in-compromise-application-2/

Option 3 — Negotiate an Installment Agreement

If you can pay your tax debt over time, an installment agreement (IA) provides a predictable monthly payment and stops certain collection actions. Types include streamlined agreements, guaranteed agreements, and partial-payment installment agreements. Key points:

  • You may apply for an IA online, by phone, or by submitting Form 9465 and required financial documentation.
  • Streamlined IAs have eligibility rules; other IAs can be negotiated if your cash flow allows monthly payments.
  • Interest and penalties continue to accrue while on an IA, but it can prevent levies or wage garnishments if you stay current.

Internal resource: Learn more about installment plans and how to choose one in our article “Installment Agreements Explained: Types, Fees, and Eligibility” — https://finhelp.io/glossary/installment-agreements-explained-types-fees-and-eligibility/

Option 4 — Request Currently Not Collectible (CNC) status

If your income and necessary living expenses leave you with no ability to pay, the IRS may place your account in CNC status. Things to know:

  • CNC pauses active collection like levies or garnishments, but interest and penalties generally continue and liens can remain in place.
  • The IRS periodically reviews CNC cases and may request updated financial information.
  • CNC does not eliminate debt; it’s a temporary relief measure until your financial situation improves.

Option 5 — Consider bankruptcy or other legal relief (with counsel)

Bankruptcy can discharge certain federal tax liabilities under strict conditions (age of the tax debt, type of tax, whether the return was filed timely, and whether there was fraud). This is a complex legal area—consult a bankruptcy attorney experienced in tax matters before pursuing this route.

Practical timeline and what to expect

  • Appeal or resubmission: several months to 12+ months depending on complexity and backlog.
  • Installment agreement setup: typically weeks to a few months if documentation is complete.
  • CNC placement: decision usually within weeks after submission of financial information.

Documentation checklist (minimum items to gather)

  • Recent pay stubs and year-to-date earnings.
  • Bank statements for several months.
  • Proof of recurring non-discretionary expenses (medical bills, child support, court-ordered payments, essential insurance).
  • Statements for retirement accounts, vehicle loans, and mortgages.
  • Documentation of business cash flow if self-employed.

See more on documents and worksheets in: “Documentation Checklist for Installment Agreements and Offers in Compromise” — https://finhelp.io/glossary/documentation-checklist-for-installment-agreements-and-offers-in-compromise/

Professional tips and common mistakes

  • Don’t assume the IRS overlooked expense categories—document every legitimate non-discretionary cost and be ready to show proof.
  • Be conservative when valuing assets; the IRS may use forced-sale or equity calculations.
  • If you appeal, focus on the IRS’s specific errors and provide concise, well-organized evidence. Lengthy, unfocused appeals slow the process.
  • Maintain communication: return calls promptly and keep copies of all correspondence.

In my practice I find that clean, well-organized financial packages and a short cover letter explaining the core dispute make a materially better impression on Appeals Officers.

What happens if you do nothing?

If you don’t appeal or pursue another option, the IRS will continue standard collection activity. That can include tax liens, levies on bank accounts or wages, and referrals to private collection agencies for older debts. Ignoring the rejection increases the risk of enforced collection and can complicate later resolution efforts.

Final checklist: immediate next steps

  1. Read the rejection letter and note deadlines.
  2. Gather and organize the documents the IRS says were missing or misvalued.
  3. Decide whether to appeal, revise/resubmit, or pursue an alternate remedy like an installment agreement or CNC—get professional help if unsure.
  4. If appealing, file within the stated deadline (typically 30 days).
  5. Keep copies of everything and track communications.

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Your situation may require individualized legal or tax counsel. Consult a qualified tax attorney, enrolled agent, or CPA to analyze your case and represent you before the IRS.

Sources and further reading

Internal FinHelp resources referenced above can help you prepare stronger packages or choose alternatives. Use them to make a practical plan before you respond to an OIC rejection.