If your offer in compromise was rejected, the IRS decision is not necessarily the end of the road. A rejection letter generally gives you 30 days to request review by the IRS Independent Office of Appeals, and you may also be able to submit a revised offer or move to a different collection alternative that fits your finances.
Because that appeal window is short, it helps to act quickly. Call (415) 754-0115 to schedule your free consultation, or use our contact page to send a copy of the rejection letter for review.
Rejected or returned: two very different letters
The first question is which kind of letter arrived, because the IRS treats these situations differently.
A rejected offer
A rejection means the IRS reviewed the offer on its merits and decided not to accept it. The most common reason is that the offer examiner calculated a reasonable collection potential (RCP) higher than the amount you offered. A rejection can be appealed.
A returned offer
A returned offer was never fully evaluated. The IRS may return an offer when required tax returns are unfiled, when estimated payments or withholding are not current, when the application is incomplete, when required payments under the offer were not made, or when a bankruptcy case is open. A returned offer generally cannot be appealed, but once the underlying problem is fixed, a new offer can often be filed.
Why an offer in compromise is rejected
An offer based on doubt as to collectibility asks the IRS to accept less because the full balance cannot realistically be collected. The IRS measures that by adding the net equity in your assets to a projection of your future disposable income. When an offer in compromise is rejected, the explanation usually traces back to one of these areas:
- Asset values. The examiner valued a home, vehicle, business or retirement account higher than you did, or did not accept the deductions you claimed against that value.
- Disallowed expenses. Living expenses above the IRS Collection Financial Standards were limited, which raises your calculated monthly ability to pay.
- Income questions. Irregular self-employment income, a recent raise or a household member's contribution changed the income figure.
- Missing documents. Requests for bank statements, appraisals or proof of expenses went unanswered.
- Dissipated assets. The IRS concluded that money or property was spent or transferred after the tax was owed and added it back into the calculation.
The rejection letter, together with the examiner's income and asset worksheets, shows where your numbers and the IRS numbers diverged. Requesting that file is often the first practical step.
How the offer in compromise appeal works
An appeal is usually requested with Form 13711, Request for Appeal of Offer in Compromise, or with a written protest that contains the required information. It must be submitted within 30 days of the date on the rejection letter.
- Identify each disputed item. The request should explain which valuations, expenses or income figures you disagree with and why.
- Support every point. Appraisals, repair estimates, medical records, lender letters and bank statements carry more weight than general statements.
- Prepare for the conference. An Appeals Officer, who is independent of the collection function that rejected the offer, reviews the file and usually holds a phone or in-person conference.
- Weigh any counterproposal. Appeals may sustain the rejection, accept the offer, or suggest a different amount or a different resolution.
What happens to collection during an appeal
The IRS generally may not levy while an offer is pending, for 30 days after a rejection, and while a timely appeal is under consideration. A federal tax lien may still be filed. The collection statute is also generally suspended during these periods, which is worth factoring into any plan.
Payments you already made
Payments submitted with an offer are generally kept by the IRS and applied to your tax balance rather than refunded. That is one reason to review the rejection carefully before deciding whether to appeal or start over.
Other paths if the IRS will not settle
An appeal is not always the most effective response. Depending on why the offer failed, an attorney can review your situation and explain whether one of these alternatives makes more sense:
- A revised offer. If your finances have changed, or the first offer was built on incomplete numbers, a new offer may reflect your circumstances more accurately. Our guide to the IRS offer in compromise explains how offers are calculated.
- An installment agreement. A full-pay or partial payment plan can stop enforced collection while you pay over time.
- Currently not collectible status. If your income only covers basic living expenses, collection may be paused. See our article on IRS currently not collectible status.
- Bankruptcy. Certain older income tax debts can be discharged or managed through a Chapter 13 plan.
The Somal Law Firm is a Pleasanton practice led by attorney Bob Somal, serving individuals and small businesses in the Tri-Valley, Alameda and Contra Costa Counties and the wider East Bay. Our tax law practice covers IRS disputes and dispute resolution, including offers, appeals and collection alternatives.
Frequently asked questions
How long do I have to appeal after my offer in compromise is rejected?
The appeal request generally must be submitted within 30 days of the date printed on the rejection letter. Missing that deadline usually means losing the right to an Appeals review of that offer.
Can I submit a new offer instead of appealing?
Often, yes. A new offer starts a fresh review and requires a new application. Whether it is wiser than an appeal depends on whether the dispute is about the IRS calculations or about a change in your finances.
Will the IRS levy my bank account after a rejection?
The IRS is generally barred from levying for 30 days after rejection and during a timely appeal. After that, enforced collection can resume unless another arrangement, such as an installment agreement, is in place.
Does a rejected offer affect a California FTB offer?
The Franchise Tax Board runs its own offer program with its own rules. An IRS decision does not decide a state offer, although both agencies look at similar financial information.
A rejection letter starts a short clock, so it helps to understand your options early. Call (415) 754-0115 to schedule your free consultation with Bob Somal, or reach us through the contact page. We will review the letter and the IRS worksheets and explain what an appeal, a new offer or another path could involve.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.