Why Do Most IRS Offer in Compromise Applications Get Denied and How Can You Avoid It?

An IRS Offer in Compromise (OIC) is one of the most powerful tax relief options available—it allows qualifying taxpayers to settle their tax debt for less than they owe. However, while the program sounds appealing, the reality is that most IRS Offer in Compromise applications are denied.

Understanding why these denials happen and how to avoid common mistakes can greatly increase your chances of success. With help from professionals like ALTA Tax Relief, you can navigate the process strategically and improve your odds of getting approved.

What Is an IRS Offer in Compromise?

An IRS Offer in Compromise is a formal contract between you and the IRS that allows you to pay less than the full amount of your tax debt if the IRS believes the full amount may be uncollectible.

Essentially, the IRS agrees to accept a smaller amount as “full payment” for your tax debt under specific conditions. But getting approved isn’t easy—the IRS closely examines your financial situation before making a decision.

Why Most IRS Offer in Compromise Applications Get Denied

While the IRS does accept some OIC applications, statistics show that the majority are rejected. Here are the most common reasons why:

1. Not Meeting Eligibility Requirements

The IRS only considers Offers in Compromise if you’ve filed all required tax returns and are current with any required estimated tax payments(personal) or payroll and corporate payments (business). Many taxpayers submit applications before they are fully compliant, leading to the offer being returned without review. 

2. Not using the IRS online Offer In Compromise Pre-Qualier tool @https://irs.treasury.gov/oic_pre_qualifier/. The IRS provides a free tool that can estimated if an offer will be accepted. Offers should only be filed if there is a reasonable chance it will get accepted as there are consequences for filing and Offer in Compromise that is rejected. 

3. Not Understanding IRS Allowable Living Expenses

When reviewing your OIC, the IRS calculates your Reasonable Collection Potential (RCP)—essentially, the total amount they believe they can collect from you through income and assets. If your reported financial information seems inaccurate or incomplete, the IRS will reject your offer. IRS only allows living expenses based upon IRS National Standards https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards

4. Too Much Equity in Assets

IRS offers require 80% of your equity in assets to be part of the offer. Assets include equity in your home, vehicles, boats, RV’s, etc. It also requires 80% of you assets in investment and retirement accounts. The majority of money in bank accounts must also be included in the offer. Many people don’t qualify due to too much equity. 

5. Lack of Supporting Documentation

Incomplete paperwork or missing documentation—like bank statements, pay stubs, or proof of expenses—can lead to an immediate rejection. The IRS expects full transparency when evaluating your financial situation.

6. Failing to Make Required Payments

If you don’t include the initial payment or application fee with your OIC submission (unless you qualify for a low-income waiver), your application will not even be processed.

7. Ongoing Compliance Issues

Even if your Offer in Compromise is initially approved, failing to stay compliant with tax filings and payments for the next five years can cause the IRS to default your agreement. If that happens, then all the taxes forgiven will come back out to be collected-with associated penalties and interest. 

How to Improve Your Chances of OIC Approval

Although getting approved for an IRS Offer in Compromise is challenging, it’s not impossible—especially with expert guidance. Here’s how you can strengthen your application:

Work with a Certified Tax Professional

A tax relief specialist, particularly one with former IRS experience like those at ALTA Tax Relief, understands how the IRS evaluates each case. They can help you prepare accurate documentation, calculate a realistic offer amount, and ensure compliance with all requirements.

Be Transparent About Your Finances

Honesty and accuracy are key. The IRS verifies your financial information against third-party data sources. Attempting to hide assets or underreport income can lead to immediate rejection—or worse, penalties.

Stay Current with Filings and Payments

Before applying, make sure all your tax returns are filed and any estimated payments are up to date. This shows the IRS that you’re serious about resolving your tax situation.

Consider Alternatives if Necessary

If you’re unlikely to qualify for an OIC, there are other programs that can offer relief, such as Installment Agreements, Penalty Abatement, or Currently Not Collectible Status. You might actually pay less by using one of these other resolutions. A professional can evaluate your best option.

Consequences for filing an Offer in Compromise that is rejected

1. Freezing of the IRS Collection Statute Expiration Date (CSED)

While an offer is being reviewed by the IRS, the CSED stop counting down to its 10-year expiration date. The offer review can take upwards of a year, and if appealed, can take up to two years. In addition, the IRS will add 3 months onto the CSED. An alternative resolution like a payment agreement or Currently Not Collectable (CNC) will not freeze the CSED.

2. Fast Track to IRS Collections

If a revenue officer was assigned your case before the offer, your collections case will probably be reassigned to that revenue officer. As substantial financial information is filed with the offer application, the IRS will have new potential collection sources. Your tax debt could also be fast tracked to the Automated Collection System (ACS) for collection actions. 

3. You will need to find a solution for your IRS tax debt-Fast

Within a matter of months of a rejected offer, you could be before the IRS again pleading your case again. This will require brand new financial information to satisfy the updated financial review of the IRS. 

Why Choose ALTA Tax Relief for Your Offer in Compromise

At ALTA Tax Relief, we’ve helped countless clients settle overwhelming tax debts for significantly less than they owed—sometimes saving them hundreds of thousands of dollars.

When you work with us, you’ll:

• Speak directly with a former IRS employee, not a call center.

• Receive honest guidance on whether an OIC is your best option.

• Get help with accurate paperwork and strategic negotiations.

• Gain peace of mind knowing professionals are handling your case from start to finish.

Our proven strategies and deep knowledge of IRS procedures have helped clients achieve life-changing financial outcomes.

Take the First Step Toward Tax Relief Today

If your IRS Offer in Compromise was denied—or if you’re considering submitting one—don’t go it alone. The application process is complex, but with expert help, you can avoid the common pitfalls that lead to rejection.

Call ALTA Tax Relief at (252) 203-0732 or schedule your free 30-minute consultation today. Speak directly with a certified tax professional and discover whether you qualify for an OIC or another form of tax relief.

Your path to financial freedom starts now.