Chapter 11 – Why the IRS Rejects or Returns Offers in Compromise

The 15 Most Common Reasons Offers Are Unsuccessful (and How to Avoid Them)

Quick Answer

Not every Offer in Compromise submitted to the IRS receives a full financial review, and not every Offer that is reviewed is accepted.

An Offer can be:

• Accepted
• Rejected
• Returned
• Withdrawn
• Closed without acceptance

These outcomes are not interchangeable.

Understanding the difference is essential because a returned Offer generally does not provide the same appeal rights as a rejected Offer. Likewise, a rejection does not necessarily mean the taxpayer will never qualify for an Offer in the future.

Many unsuccessful Offers can be traced to preventable issues such as filing noncompliance, incomplete financial disclosures, unrealistic Offer amounts, or failure to respond to IRS requests.

Returned vs. Rejected

One of the biggest misconceptions is that every unsuccessful Offer is a “denial.”

In practice, there are important distinctions.

Returned Offer

A returned Offer generally means the IRS did not complete a full evaluation because procedural requirements were not satisfied or the taxpayer failed to meet certain obligations during the review process.

Examples include:

• Required tax returns were not filed.
• Current filing obligations were not maintained.
• Required information was not provided.
• The taxpayer failed to respond to IRS requests.
• Bankruptcy proceedings affected consideration of the Offer.

A returned Offer reflects that the IRS could not continue processing the application—not necessarily that the taxpayer could never qualify.

Rejected Offer

A rejected Offer generally means the IRS completed its financial analysis and determined that the Offer did not satisfy the applicable legal standards.

For example:

• The IRS concluded it could reasonably collect more than the amount offered.
• The taxpayer’s reasonable collection potential exceeded the Offer amount.
• The evidence did not support the basis for compromise.

Depending on the circumstances, a rejected Offer can be appealed.

The IRS Does Not Reject Offers Randomly

Taxpayers sometimes believe the IRS simply rejects most Offers.

In reality, Offer Specialists generally follow established procedures and evaluate:

• Financial disclosures
• Supporting documentation
• Collection potential
• Asset values
• Income
• Expenses
• Compliance
• Applicable Internal Revenue Manual guidance

The stronger and more complete the financial presentation, the easier it is for the IRS to evaluate the case.

The 15 Most Common Reasons Offers Are Unsuccessful

Reason #1

Unfiled Tax Returns

This is perhaps the most common issue.

Many taxpayers spend weeks preparing financial statements…

…only to discover required returns remain unfiled.

Without filing compliance, the IRS can be unable to continue processing the Offer.

Lesson From More Than 500 IRS Cases

Always determine filing compliance before beginning the Offer.

Reason #2

Current Taxes Are Not Being Paid

For self-employed individuals this often means:

Quarterly estimated tax payments.

For businesses:

Current payroll deposits.

The IRS generally expects taxpayers to remain compliant while requesting relief.

Reason #3

The Offer Amount Is Unrealistically Low

Some taxpayers choose a number because:

“It sounds reasonable.”

Unfortunately…

The IRS performs its own financial analysis.

The Offer should generally reflect the taxpayer’s documented reasonable collection potential—not a hoped-for settlement amount.

Reason #4

Missing Financial Documentation

Examples include:

• Bank statements
• Mortgage information
• Retirement statements
• Brokerage accounts
• Vehicle documentation
• Medical expense records

Without documentation…

The IRS cannot verify the financial information.

Reason #5

Incomplete Financial Statements

Missing:

• Assets
• Income
• Business interests
• Loans
• Investments
• Real estate

creates unnecessary questions.

Complete disclosure is critical.

Lesson #18

Partial disclosure often creates additional scrutiny.

Full disclosure supported by documentation generally strengthens credibility.

Reason #6

Undervaluing Assets

Some taxpayers unintentionally underestimate:

• Home values
• Investment accounts
• Vehicles
• Business assets

The IRS compares taxpayer valuations with available records and can request additional support when values appear inconsistent.

Reason #7

Overstated Expenses

Not every monthly expense is automatically allowable.

Examples that can receive closer review include:

• Luxury vehicle payments
• Vacation homes
• Private school tuition (depending on the circumstances)
• Entertainment expenses
• Club memberships

The IRS generally distinguishes between necessary living expenses and discretionary spending.

Reason #8

Failure to Respond to IRS Requests

Offer Specialists frequently request:

Updated bank statements.

Additional explanations.

Revised financial information.

Supporting documentation.

Ignoring those requests can prevent the IRS from completing its review.

Lesson From More Than 500 IRS Cases

Communication matters.

When the IRS requests information, timely and organized responses help keep the review moving.

Reason #9

Financial Circumstances Changed

Offers sometimes remain under review for many months.

During that time:

Income changes.

Employment changes.

Businesses improve.

Assets are sold.

Medical conditions change.

The IRS can request updated financial information before making a final decision.

Reason #10

Asset Transfers

Transfers made shortly before submitting an Offer often receive careful attention.

Examples include:

Selling property to relatives.

Giving away investments.

Removing names from accounts.

Transferring vehicles.

The IRS can evaluate the facts surrounding these transactions when reviewing the application.

Reason #11

Business Records Are Incomplete

Business Offers often require substantially more documentation than individual Offers.

Common issues include:

Incomplete bookkeeping.

Missing payroll reports.

No Profit & Loss Statement.

Unreconciled bank accounts.

Missing receivables.

The stronger the records…

…the easier the financial review.

Reason #12

Significant Equity Exists

Sometimes the taxpayer simply has sufficient:

Home equity.

Investments.

Retirement assets.

Business assets.

Future income.

In those situations…

The IRS can conclude full collection remains reasonably possible.

Lesson #19

Large tax debts do not necessarily create stronger Offers.

Financial ability to pay is generally much more important than the total liability.

Reason #13

Future Income Is Too High

Even when asset equity is modest…

Strong disposable income can substantially increase Reasonable Collection Potential.

Many taxpayers underestimate this component.

Reason #14

Inconsistent Information

The IRS compares:

Tax returns.

W-2s.

1099s.

Bank deposits.

Public records.

Credit reports.

Business records.

Financial statements.

Inconsistencies frequently lead to additional questions.

Reason #15

An Offer Was Never the Best Resolution

This can be the most overlooked reason.

Sometimes…

An Offer simply is not the strongest solution.

Examples include:

Installment Agreement.

Partial Pay Installment Agreement.

Currently Not Collectible status.

Penalty Abatement.

Audit reconsideration.

Innocent Spouse Relief.

Waiting for the Collection Statute Expiration Date.

Professional representation includes identifying the most appropriate strategy—not automatically recommending an Offer.

Lessons From More Than 500 IRS Cases

Lesson #20

One of the most valuable services we provide is advising taxpayers not to file an Offer when another resolution appears more appropriate.

A carefully prepared Installment Agreement or Currently Not Collectible request can provide a faster, less expensive, and more predictable resolution than pursuing an Offer with a low likelihood of success.

Our responsibility is to recommend the strategy supported by the taxpayer’s facts—not the strategy most heavily advertised.

What Happens After a Rejection?

If the IRS rejects an Offer after completing its financial review, the taxpayer can have administrative rights to request review by the IRS Independent Office of Appeals, provided the request is made within the applicable time limits.

An appeal is not simply a request to “try again.” It should identify why the taxpayer believes the decision was incorrect, whether the IRS misapplied the facts, overlooked documentation, or improperly evaluated the financial information.

A well-supported appeal focuses on evidence rather than disagreement alone.

Case Study

The Right Strategy Was Not an Offer

Situation

A taxpayer owed approximately $168,000 in federal income taxes and contacted our office after another firm advised filing an Offer in Compromise. The taxpayer had substantial equity in a residence, stable employment, and significant monthly disposable income.

Our Evaluation

Before preparing an Offer, we completed a comprehensive financial analysis. Based on the available equity and income, we concluded that the taxpayer’s reasonable collection potential was likely higher than the amount they hoped to offer. Rather than encouraging an Offer with a low probability of success, we discussed alternative collection options that better matched the taxpayer’s circumstances.

Outcome

The taxpayer pursued a different IRS resolution that addressed the liability without incurring the additional time and expense of an Offer that appeared unlikely to be accepted.

Takeaway

Professional representation is not measured by the number of Offers filed. It is measured by selecting the resolution strategy that best fits the facts, the law, and the taxpayer’s long-term objectives.

Frequently Asked Questions

Does a rejected Offer mean I can never file another one?

Not necessarily. A later Offer can be appropriate if your financial circumstances materially change or additional information becomes available. Any future submission should be based on the current facts and applicable IRS procedures.

Can I appeal a rejected Offer?

In many cases, yes. Taxpayers have the opportunity to request review by the IRS Independent Office of Appeals if they act within the applicable deadline and meet procedural requirements.

Should I immediately file another Offer after a rejection?

Not always. It is usually better to understand why the Offer was unsuccessful before deciding whether to appeal, submit a new Offer, or pursue a different collection alternative.

Is a returned Offer the same as a rejected Offer?

No. A returned Offer generally means the IRS did not complete a full evaluation because of a procedural or compliance issue, while a rejected Offer reflects a completed financial analysis and determination on the merits.

Why Experience Matters

At the national tax representation firm of Mike Habib, EA, we begin by evaluating whether an Offer in Compromise is the right solution—not merely an available one. In our experience representing taxpayers for more than 20 years, many successful outcomes begin with an honest assessment of the facts before any forms are filed.

We represent taxpayers nationwide using transparent flat-fee pricing, so clients know the cost of representation in advance. Rather than billing by the hour, we focus on careful analysis, thorough preparation, and selecting the IRS resolution strategy that best aligns with each taxpayer’s financial circumstances and legal options.

Related chapters: Chapter 7 — The Complete Guide to the IRS Offer in Compromise; Chapter 10 — The IRS Offer in Compromise Application Process; Chapter 16 — The Complete Guide to IRS Appeals