There are numerous radio and television ads these days geared toward individuals who owe back taxes to the IRS. They usually mention the IRS Fresh Start Initiative and make claims that they can settle your tax debt for “pennies on the dollar.” This is accomplished through what is called an offer in compromise (OIC). Though OICs can be an effective way to settle an IRS tax debt, an offer for pennies on the dollar is only accepted in extremely rare cases.

The OIC Process: When you submit an offer in compromise, you are asking the IRS to accept less than what you owe, and (hopefully) providing them with valid reasons why it is in their best interest to do so. There are three possible results when you make such an offer:

• Your offer is accepted
• Your offer is rejected
• Your offer is returned

Acceptance: Though rare, an OIC may be accepted on the first submission. Clearly, this is the most desired result, and it means you have essentially “won” your battle with the IRS by convincing them your offer is reasonable given your circumstances.

Rejection: As the name implies, when an OIC is rejected, this means you failed to convince the IRS your offer is reasonable. Rejection is the most common result of a settlement offer, and at this point, many taxpayers give up. There is an appeals process, however. Within 30 days of receiving the rejection notice, you must file an appeal stating the precise reason you believe they should have accepted your offer.

Since the IRS evaluates these offers based primarily on the finances of the taxpayer and their ability to pay, a successful appeal is only likely if you can show the agency they missed a critical element of your financial picture. In many cases, a better option when your offer is rejected is to submit a new OIC with terms more favorable to the IRS.

Returned: An offer in compromise is typically returned for one of three reasons:

• The offer was incomplete; in other words, you failed to provide the IRS with all the necessary information to properly evaluate your proposal.

• You have previously submitted an offer that was identical to this one.

• Your offer is frivolous; in other words, your OIC was groundless and/or submitted for the express purpose of delaying/avoiding collection.

A returned OIC can be resubmitted. Before doing so, however, make sure to correct any errors that led to the return in the first place, and make sure to resubmit the offer before collection activity begins.

When trying to settle an IRS tax debt, offers in compromise are definitely not a sure thing. Only around 25% of OICs are accepted by the IRS every year, and taxpayers often have far better luck with installment agreements. To increase your chances of success with an offer in compromise, it is best to work with a local tax professional with in-depth knowledge of the process and how to overcome common hurdles to gaining acceptance.