The IRS rejects a lot of Offers in Compromise (OICs). When an offer is rejected, you have 30 days to request an appeal. You can also consider using other tax resolution strategies.
Key Insights We Will Discuss
- Why the IRS rejects an Offer in Compromise
- Reasons you should consider appealing a rejection of your Offer in Compromise.
- The Requirements for submitting a valid appeal.
Why The IRS Rejected Your Offer In Compromise
The short answer here is that the IRS rejects a return when your offer amount is less than your reasonable collection potential. However, like most things in life, the issue is a bit more complex than that. For instance, you are probably wondering “well how did they arrive at that conclusion? Isn’t this based on a mathematical formula?” Well yes and no – mostly yes but what goes into that formula is often a little unclear. Allow me to explain.
One reason your Offer may be rejected is because the IRS is under the assumption that you can, in fact, pay the full amount from your future income. And they define your future income as the amount you earn, minus the necessary living expenses. Sounds simple enough right? Okay but what about when it isn’t so simple. Take, for instance your expenses. Let’s say your monthly housing and utilities (e.g. mortgage/rent, gas/electric, water, sewer, trash, cable, internet and phone bill) cost $3,550. Okay but you live in Ohio, where the standard amount for those expenses is only $1,942. Now what? Well, I hate to be the bearer of bad news but in a situation like this, the IRS would only allow you the smaller number. Therefore, there is $1,608 in expenses every month not being covered or taken into consideration. What is worse, that number gets added to your Offer amount.
Another problem that may arise is that the IRS is grossly misinformed about how much you actually make. How is this possible? Well, the IRS requires pay stubs for 3-6 months (usually closer to 3). Seems fair right? But what about when it isn’t? For instance what if you are self-employed and those 3-6 months you had – for whatever reason – a higher income than you normally do. Or what if you are a seasonal employee such as a contractor or gardener? You will undoubtedly make more money in the spring and summer than you would during the cooler months. And what if the IRS only saw pay stubs from those warmer months? They will make the assumption that your income is always like that. What about people who work on commission who can go weeks or even months without seeing a paycheck but then make some big sales during other weeks/months? What about if you are close to retiring? Or going from full-time to part-time? Or if you develop medical issues or trauma that will affect your ability to work in the future? I don’t think I need to keep going.
You get my point. 3-6 months of substantiated income is not always reflective of your overall long-term income amount. And the IRS will take the path of least resistance when determining how much you actually make. In other words, they will not take these factors into consideration. They just look at the numbers. That is why it is imperative that you appeal because only then will they take these issues into consideration.
These are just a few of the reasons the IRS may have rejected your OIC but whatever the reason is – it all boils down to one thing: they believe that you can pay more than you are claiming. That is why it is your responsibility to show them that that is, in fact, untrue.
Reasons To Request An Appeal
If you get that dreaded letter in the mailbox informing you that your Offer in Compromise has been rejected it can be a real bummer. But there is hope. You can appeal. If you disagree with the rejection of your OIC, you will need to provide a specific reason for your disagreement. Simply stating that you cannot pay your taxes will not suffice.
Your reasonable collection potential is based on your income, expenses, and equity in assets. You will need to carefully review the information that came with your rejection letter and determine whether all of the numbers are accurate.
You may want to request an appeal for any of the following reasons:
- You disagree with the amounts determined for your income, including wages, pensions, Social Security benefits, or other income.
- You disagree with the allowable expense amount for any category of expenses.
- You disagree with the amounts given for the value of your assets.
- You have special circumstances that warrant acceptance of your OIC.
How To Request An Appeal
You have 30 days from the date on the rejection letter to request an appeal. Make sure you provide specific reasons for requesting an appeal and include any supporting documentation that helps your arguments.
An IRS Appeals Officer will be handling your appeal. The Appeals Office is entirely separate from the department that handled your initial OIC, so you’ll get a fresh pair of eyes to review your offer.
Having a tax attorney on your side can be very beneficial when dealing with IRS Appeals. The decision of the Appeals Officer is final, so you’ll want to put everything you have into making your case.
If your appeal is denied, you have the option to submit another OIC or consider your other tax resolution options, such as an installment agreement.
Have a question? Contact Venar Ayar.