Letter 86C: Refusal to Process Offer in Compromise

Understanding IRS Letter 86C: A Refusal to Process Your Offer in Compromise

Dealing with tax debt can be stressful, and an Offer in Compromise (OIC) can seem like a lifeline. An OIC lets you potentially settle your tax debt with the IRS for less than the full amount owed. It’s not an easy path, and there are specific rules and forms to follow. If you’ve applied for an OIC and received IRS Letter 86C, it means your OIC application won’t even be considered. So, what happened? Let’s break it down.

What is an Offer in Compromise (OIC)? A Quick Review

Before we dive into Letter 86C, let’s recap what an Offer in Compromise is. An OIC is an agreement between you and the IRS that allows you to pay off your tax debt for a smaller amount than what you originally owe. The IRS doesn’t just hand out OICs; they only approve them in certain circumstances. They mainly look at:

• Your Ability to Pay: How much you can realistically afford to pay, based on your income, assets, and living expenses.
• Your Income and Expenses: The IRS needs to know your current and future financial situation.
• Equity of your Assets: The value of the things you own, like your house, car, etc., that could be turned into cash to pay your debt.
• Your Overall Tax History: They look at if you’ve consistently filed and paid your taxes on time.

Why Did You Receive Letter 86C? Understanding the Reasons for Refusal

The key thing about Letter 86C is that it means your OIC was refused before the IRS even looked at your ability to pay. This typically happens due to procedural or eligibility issues in your initial application. Here are some common reasons why the IRS might refuse to process your OIC with a Letter 86C:

1. You Have Not Filed All Required Tax Returns

• The Problem: You can’t get an OIC if you haven’t filed all your tax returns for years when you had a filing requirement. This includes all current and past tax years.
• What to Do: Before submitting an OIC, make absolutely sure you’ve filed all the necessary tax returns. The IRS will not process your offer if your tax record isn’t up to date.

2. You’re Currently in an Open Bankruptcy

• The Problem: If you are currently in an active bankruptcy, the IRS will not process an OIC. Bankruptcy proceedings have their own rules about settling debts, and the OIC program isn’t set up to work with open bankruptcies.
• What to Do: Wait until your bankruptcy case is closed before submitting an OIC.

3. You Didn’t Include the Application Fee

• The Problem: The IRS requires a non-refundable application fee to submit an OIC (some low income taxpayers may be able to qualify for a waiver). If you didn’t include payment for the fee (or the waiver request), your offer will be refused.
• What to Do: Double-check that you included the required payment. If you missed it, include the payment with your next OIC application.

4. You Didn’t Include All Required Information and Documentation

• The Problem: The IRS needs a lot of information to assess an OIC. If important forms or documents are missing, they won’t proceed. This includes things like Form 433-A (OIC) for individuals, Form 433-B (OIC) for businesses, and pay stubs.
• What to Do: Carefully review all required forms and documentation. Ensure you have completed all fields correctly and provided all supporting documents.

5. You’re Still Under Audit

• The Problem: If your tax return is currently being audited, the IRS won’t process your OIC. This is because the outcome of the audit could change the amount of tax you owe.
• What to Do: Wait until the audit is concluded before submitting an OIC.

6. You Didn’t Respond to Previous IRS Requests

• The Problem: If you failed to respond to the IRS requests for additional information or action, they will likely refuse to process your offer.
• What to Do: If you have an outstanding request you did not respond to, respond immediately and explain the reason for the delay.

What Does Letter 86C NOT Mean?

It’s crucial to understand what Letter 86C doesn’t mean. It does not mean:

• Your OIC was denied: This is a refusal to process, not a denial of your OIC based on your ability to pay.
• You’re out of options: You can correct the issues and resubmit your application.
• You’re stuck with your tax debt: There are other ways to resolve tax debt, even if an OIC isn’t possible.

What To Do After Receiving Letter 86C

So, you have received Letter 86C, what should you do? Here’s a step-by-step approach:

1. Carefully Read Letter 86C: Understand why your application was refused. The letter will outline the specific reason(s).
2. Correct the Errors: Address the issues that led to the refusal. Gather any missing forms, file outstanding tax returns, pay the application fee, or whatever action is required.
   3 Respond Promptly: It’s important to act quickly. If the letter says you need to respond or take specific action, do so right away to avoid further issues.
3. Resubmit Your Application: After correcting errors, you can resubmit your OIC application. Be thorough, and double-check everything.
4. Get Professional Help: If you’re feeling overwhelmed or confused, talk to a qualified tax professional, like an Enrolled Agent or CPA. They can review your situation, offer expert advice, and help you navigate the process.
5. Explore Other Options: If an OIC isn’t feasible, explore alternative ways to manage your tax debt, such as payment plans, hardship deferrals, or partial payment installment agreements (PPIAs).

Common Mistakes and Misconceptions about Letter 86C

• Thinking it’s a denial: It’s a procedural issue, not a denial based on your financial situation.
• Ignoring the Letter: You need to address the issues and take action. Ignoring it won’t make the problem go away.
• Assuming an OIC is Easy: An OIC is a complex process. It requires precise paperwork and meeting certain requirements.
• Giving up: If you’re eligible for an OIC, don’t get discouraged by a refusal to process. Fix the problems and try again.

Key Takeaways

Letter 86C is a setback, but it’s not the end of the road. It means your OIC application was refused on a technicality. By understanding the reasons for the refusal, fixing the problems, and acting quickly, you can get back on track. Remember, there are resources available to help. Don’t hesitate to seek professional tax assistance if you need guidance.