An Offer in Compromise (OIC) serves as a valuable tax relief tool provided by the IRS to taxpayers who cannot fully pay their tax debts or doing so would create financial hardship. The OIC allows you to propose a settlement amount lower than your total tax liability, potentially easing your financial burden. However, many OIC applications are rejected due to common avoidable errors and misunderstandings. Knowing how to prepare a strong and accurate offer can significantly improve your chances of approval.

Understanding the Offer in Compromise Process

When you submit an OIC, you need to complete IRS Form 656 along with a financial statement on Form 433-A (for individuals) or 433-B (for businesses). These forms require detailed disclosure of your income, assets, expenses, and liabilities. The IRS evaluates your “reasonable collection potential,” which estimates what the agency believes it can collect from your current and future financial resources. Your offer must be realistic based on this evaluation to be considered.

Common Reasons the IRS Rejects Offers in Compromise

  • Incomplete or inaccurate application forms: Mistakes, missing entries, or discrepancies on Form 656 or 433-A/B can delay or disqualify your offer.
  • Unrealistic offer amount: Proposing an amount significantly lower than your reasonable collection potential typically causes outright denial.
  • Missing supporting documentation: Bank statements, pay stubs, recent tax returns, and proof of necessary monthly expenses must be included to validate your financial situation.
  • Failure to file required tax returns: All outstanding tax returns must be filed before the IRS will process your offer.
  • Noncompliance with tax payment obligations: You cannot have outstanding tax liabilities such as recent payroll taxes that must be paid in full or under special IRS review.

Tips for Preparing a Strong Offer in Compromise

  1. Complete all IRS forms carefully and accurately. Review Form 656 and Form 433-A/B thoroughly to ensure all details are correct before submission.
  2. Gather and submit comprehensive documentation. Include recent pay stubs, bank statements, and statements of monthly living expenses to provide a complete financial picture. For more guidance, see Filing an Offer in Compromise: Documentation Checklist.
  3. Calculate a realistic offer amount. Use the IRS’s Collectible Value calculation, which considers your net equity in assets and future income minus allowed expenses. Consult resources like Estimating the Minimum Acceptable Offer in an Offer in Compromise for detailed insights.
  4. Stay compliant with all filing and payment requirements. File all required tax returns promptly and ensure any current tax payments are up to date during the review period.
  5. Consider professional assistance. Tax professionals or IRS-authorized tax attorneys and enrolled agents can help prepare your application, minimize errors, and improve success rates.

Real-Life Example

John, a small business owner with a $30,000 tax debt, initially submitted an OIC without recent pay stubs or a clear explanation of his high living expenses. His offer was rejected due to insufficient documentation and an unrealistic proposed amount. After working with a tax professional to compile full financial records and submit a reasonable offer of $10,000, his OIC was accepted, which relieved significant financial stress.

Frequently Asked Questions

Q: Can I submit an Offer in Compromise if I haven’t filed all tax returns?
A: No, the IRS requires all tax returns to be filed before considering an OIC. Unfiled returns must be submitted first.

Q: How long does the IRS take to review an Offer in Compromise?
A: The review process usually takes between 6 to 9 months. Staying compliant during this time is critical.

Q: What options are available if my Offer in Compromise is rejected?
A: You may appeal the rejection or explore alternative solutions such as installment agreements. See How to Appeal an Offer in Compromise Rejection and Next Steps for detailed guidance.

Additional Resources

Understanding how to prepare a thorough, realistic Offer in Compromise with complete documentation and compliance can save you time and help you settle your tax debt on favorable terms. Don’t overlook the value of professional help and detailed preparation to avoid common pitfalls and IRS rejection.