If you’re struggling with back taxes, common mistakes, like missing documents or incorrect information, can prevent you from getting a fresh start. For back taxes or unfiled tax returns, the Offer in Compromise can help you settle your tax debt for less than you owe, but only if you apply correctly.
Here are some of the most common mistakes that you must look out for. Avoiding these and following IRS guidelines closely will boost your chances of approval and help you resolve your tax debt successfully.
Understanding the Offer in Compromise (OIC) Process Before Applying
Before you submit any forms, it’s essential to understand what the Offer in Compromise is and when it actually applies to your situation.
What is an Offer in Compromise?
An Offer in Compromise is an agreement between you and the IRS allowing you to settle your tax debt for less than the full amount due. It’s designed for those who can’t afford to pay in full or would face serious financial hardship by doing so. This program balances taxpayer relief with the IRS’s responsibility to collect what’s reasonably possible. There are three core reasons the IRS may accept an OIC:
- Doubt as to collectibility: When your income and assets are insufficient to cover your total tax bill.
- Doubt as to liability: When you genuinely believe the amount assessed isn’t correct.
- Effective tax administration: When paying the total amount would cause unnecessary financial hardship.
These reasons sound simple, but the paperwork and evaluation are anything but.
IRS Criteria for Acceptance
The IRS evaluates every OIC based on something called Reasonable Collection Potential (RCP), essentially how much they believe they can collect from you through income, assets, and future earnings. If your offer is below your RCP, it’ll likely be rejected regardless of your intent.
To qualify, you must:
- Have filed all required tax returns.
- Be current on any estimated tax payments.
- Not be in an active bankruptcy case.
- If you own a business, be current with payroll tax deposits.
Offer in Compromise Common Mistakes That Lead to Rejection
Let’s discuss what causes most OIC applications to fail. These mistakes are completely avoidable, but only if you know what to look out for.
Mistake 1: Submitting Incomplete or Incorrect Forms
The number one issue leading to rejection is submitting incomplete, improperly filled, or inconsistent forms. Forms 433-A/B and 656 are mandatory, and a single missing signature or figure can halt processing completely. Here’s what to check:
- Every form is signed and dated.
- Numbers match between your supporting documents and your application.
- You’ve included the $205 application fee and initial payment unless you qualify for a waiver.
Even minor math errors or missing attachments can turn your application into a “returned” case, forcing you to start all over again.
Mistake 2: Underreporting or Hiding Assets
Some applicants assume that if the IRS doesn’t see an asset, it doesn’t exist. Big mistake. The IRS verifies every number you report using bank statements, credit reports, and public records. Attempting to hide money or understate property values can lead to automatic rejection or even penalties for fraud. A safer approach is to be honest, and if your assets are tied up in essential expenses, document it clearly. Transparency improves trust and speeds up approval.
Mistake 3: Miscalculating Future Income
Many taxpayers incorrectly project their future earnings when calculating offer amounts. The IRS uses standardized “allowable expense” tables that often differ from your actual living costs. For example, your real rent might be $2,000, but if the IRS limit for your region is $1,500, that’s all they’ll allow. Failing to calculate based on these standards can make your offer appear too low, another easy rejection reason.
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OIC Application Errors to Avoid During Submission
Even if your forms are perfect, these OIC application errors to avoid during submission can cost you valuable weeks or even months.
Ignoring Allowable Expense Standards
The IRS won’t accept every personal expense you claim. Expenses must fit their published “allowable expense” ranges based on your area and household size. If you list excessive costs (like high car payments or luxury expenses), your reasonable collection potential increases, reducing your odds of approval.
Submitting an Offer Before Reviewing Statute of Limitations
Every tax debt has a collection statute expiration date (CSED), usually ten years from the assessment date. Submitting an OIC when your debt is near expiration can give the IRS more time to collect. Always review your CSED before applying; sometimes waiting a few months can be wiser than rushing into submission.
Not Staying in Tax Compliance
To even be eligible, you must be fully tax compliant, meaning all tax returns are filed, and you’re current on any ongoing payments. If you owe for this year or haven’t filed recent returns, your offer won’t be processed. Stay ahead by checking compliance first, then applying. Missing this step can’t be fixed later in the process.
Common OIC Rejection Reasons and How to Fix Them
Even well-prepared applications can face rejection for reasons that are often fixable. Here’s how to address the most frequent issues.
IRS Finds You Can Pay in Full
If your income and assets show you can pay your tax debt in full, the IRS will likely reject your Offer in Compromise. In these cases, it’s better to consider an installment agreement, which is faster and avoids outright denial. If your financial situation changes (for example, job loss or medical issues), reapply with updated documentation that supports your hardship.
Poor Documentation or Missing Proof of Expenses
Detailed proof matters. If you list expenses like insurance, rent, or childcare, the IRS expects documentation for at least three months. Missing records delay processing or result in rejection. Keep electronic and printed copies of every bill, deposit, and withdrawal. This level of preparation often makes the difference between approval and denial.
Filing While Ineligible or Applying Too Early
Applications filed during bankruptcy or before compliance requirements are rejected automatically. Double-check eligibility through the IRS Pre-Qualifier Tool online before submitting anything.
How to File an OIC Correctly for the Best Chance of Approval?
Ready to do it the right way? Here’s how to file an OIC correctly step-by-step.
Step 1 – Verify Eligibility and Compliance First
Use the IRS Pre-Qualifier Tool to check if you meet the basic requirements for an Offer in Compromise. Make sure all your tax returns are filed and your estimated payments are up to date before applying.
Step 2 – Prepare Accurate Forms (Form 433-A/B, 656)
Forms 433-A or 433-B and Form 656 are mandatory and should reflect your real income, assets, and expenses.
Step 3 – Double-Check All Income and Asset Values
Ensure every number is consistent with your supporting documents, pay stubs, bank balances, property estimates, and investments.
Step 4 – Submit Required Fees and Initial Payment
Include the $205 application fee and initial payment. Missing either halts processing. Choose between a lump sum (20% payment) or periodic payments as outlined by the IRS.
Step 5 – Track and Respond Promptly to IRS Queries
IRS reviews can take six months or more, depending on complexity. Promptly answer requests for clarification or extra documentation. Silence may result in automatic denial.
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Expert Tips to Avoid Costly Offer in Compromise Mistakes
Work With a Certified Tax Resolution Specialist
A tax resolution specialist understands the key points of IRS rules and can represent you during any disputes. Experts like Tina Hall, Founder of Halls IRS, have helped clients successfully reduce tax debts through precise filings and compliance checks.
Use IRS Pre-Qualifier Tool Before Applying
This quick online tool filters out ineligible applicants and helps estimate acceptable offer amounts. It’s a small step that prevents big delays.
Appeal Quickly After a Rejection (Within 30 Days)
IRS rejections are appealable within 30 days. Many successful OICs get approved after corrections during appeal. Submit Form 13711 for formal reconsideration if your circumstances justify it.
Avoid OIC Mistakes by Filing Smart and Accurate Applications
When it comes to the Offer in Compromise, common mistakes, and most rejections come down to missing paperwork, inaccurate math, or misunderstanding eligibility. Filing a clean, well-documented application supported by realistic numbers dramatically increases approval chances.
If you’re unsure, seek professional help from specialists like Halls IRS, based in Swainsboro, GA. They have strong experience in spotting mistakes to avoid and understanding why offers get rejected, making them a great partner to help you get the tax relief you need. Take every step carefully and stay accurate.
FAQs
Q1. What are the most frequent reasons for an Offer in Compromise rejection?
The IRS does the most to decline an Offer in Compromise on the basis that the taxpayer can pay the entire tax balance, or you have not included every piece of information or have included inaccurate information in your application. Not filing all the necessary tax returns, not paying at all, or not keeping up with tax requirements are other common reasons behind not being denied. Any mistakes in the financial paperwork and failure to comply when the review process is conducted are likely to all but ensure that your OIC is dismissed.
Q2. What is the average time that the IRS requires to approve an OIC?
It typically requires between 4 to 9 months to approve an Offer in Compromise based on the complexity of the case and the workload of the IRS. The review consists of the verification of all financial documents and the compliance check, and the IRS can make contact to seek clarification. It is possible to respond fast to any requests and avoid delays and accelerate the approval timeline.
Q3. Is it possible to re-apply once OIC is rejected?
When you would like to appeal the rejections of your Offer in Compromise, the deadline would be 30 days, after which you can go through the instructions provided with the IRS rejection letter. Fixing mistakes and providing the missing records improves your chances of being reinstated in case you reapply. Through the appeal and submission of proper, complete information, many taxpayers are able to get approval.
Q4. Is it better to employ a tax professional to increase the approval rates?
To have a high probability of success with your offer, hire an experienced tax professional. They assist in making sure you have all the forms filled, your calculations are accurate, and that you have all the compliance requirements. Their knowledge minimizes mistakes that usually result in rejection, and they offer critical suggestions during the process.
Q5. What are the most frequently missing documents in the OIC applications?
Candidates often lose documentation of income, expense reports, complete bank statements, as well as documentation of assets such as property and vehicles. If you don’t include all required documents, your application can be delayed or rejected.
