Updated: Oct 23, 2021
Settle your tax debt for pennies on the dollar!
I know you've heard the promises made by the big corporate tax mills on the radio and TV, I hear them too. Empty promises from the big companies that take your money and submit an offer to the IRS whether you actually qualify for an offer or not.
Companies like this are why the acceptance rate for Offers in Compromise are steadily decreasing. According to IRS data that was released roughly 17,890 approvals were made from the 54,225 applications received in 2019. That's only a 33% acceptance rate! The truth of the matter is, it isn't hard to get an offer accepted if you qualify.
Note: You will want to make sure if you don't know how to get your offer accepted you have a tax relief specialist on your team that knows how to work with the IRS.
To understand the 4 reasons that the IRS rejects an OIC you must first understand what the IRS looks at when they review an offer.
When the IRS first receives an offer they arrange an asset and income analysis. They take the fair market value of each asset and assume an 80% quick sale value. If a taxpayer has a lot of equity in their assets they won't be eligible for an offer in compromise because the IRS will expect them to sell their assets and pay their debt.
The income analysis uses a taxpayer's gross monthly income and subtracts all allowable expenses using the national standards for food and clothing, local standards for housing, and other allowable expenses. This budget is then used with a projected cash flow for the next 12 months with net equity to determine how much the taxpayer can reasonably pay. This is the amount that the IRS will go for in an OIC. Taxpayer's often have more money left over after paying for the essentials than they think. This brings us to our first reason why the IRS rejects an Offer in Compromise.
The IRS believes that the taxpayer can fully pay the debt before the statute of time expires.
So the IRS does not accept the offer made. The taxpayer has the burden of proving that they cannot afford payments to the IRS. If you do not already have a budget, Mykail James aka the Boujie Budgeter has a free template on her website that is good for figuring out your monthly cashflow. You can use this to determine what you have left after paying for necessities each month. This is a good tool to have whether the IRS accepts your offer or not but it can give you a good idea if you should even make an offer.
The IRS thinks your offer is too low for your financial capacity.
A taxpayer's definition of broke is not the same as the IRS' definition of broke. When the IRS evaluates what a taxpayer can afford to pay they often come up with an amount that is much higher than what the average taxpayer would. You can check out the national and local living standards that are allowed by the IRS when figuring out what the IRS will deem you can afford to pay. Another good tool to use is the IRS Pre-qualifier to see if you're a good candidate for an offer.
You submitted the Offer in Compromise only to delay proceedings by the IRS.
When you submit an offer just to delay another case with the IRS they will reject the offer. The reasons for this are recidivism and high chances of fraud. The IRS can see through these empty offers with no problem. If you have a history of being delinquent with payments or make no payments at all the chances of the IRS accepting an offer are lower. An IRS Revenue Officer will see right through this type of offer.
You incur additional tax debt while waiting for the IRS.
One thing that taxpayer's forget about when cutting a deal with the IRS is that they must stay tax compliant or the IRS can take the arrangement that has been made off the table. For example: if a taxpayer makes an offer for the 2018 tax year but the 2019 tax year arrives the taxpayer needs to make sure that the 2019 tax debt is paid to show good faith while negotiating the offer for 2018. Whether that means adjusting paycheck withholding and or making estimated tax payments.
There are other reasons that the IRS can reject your OIC but the 4 shared today are the most common that I have seen. The IRS will always give you a reason for why they rejected your OIC. You will also be given the opportunity to appeal the IRS decision.
Which reason for OIC rejection did you not know about? Tell me down in the comments.
Timalyn S. Bowens EA is America's Favorite EA and Louisville's Tax Expert that will work hard to find a legal solution that is customized for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.