The IRS Fresh Start Program is one of the most effective ways to resolve tax debt, but approval is never a "sure thing." In fact, a significant percentage of applications—especially for debt settlements like the Offer in Compromise (OIC), are rejected or returned by the IRS every year.
If you are planning to apply in 2026, avoiding these five common pitfalls will significantly increase your chances of success.
1. Missing or "Unfiled" Tax Returns
This is the #1 reason applications are rejected before a human even looks at them. The IRS considers a taxpayer "non-compliant" if they have even one missing tax return from the last six years.
- The Fix: Before you submit a Fresh Start request, perform a transcript check. Ensure every required return is filed—even if you can't pay the balance yet. The IRS won't help you fix old debt if you aren't currently following the rules.
2. Calculation Errors in "Reasonable Collection Potential" (RCP)
When you apply for a settlement, the IRS uses a specific formula to decide if you truly can't pay. They look at your assets and your monthly disposable income. Many taxpayers get denied because they:
- Underestimate the value of their home or car.
- Forget to include "liquid assets" like 404(k)s or stocks.
- The Fix: Use a professional to run an RCP calculation before filing. If the IRS math shows you can pay the debt over time through an installment agreement, they will deny your settlement offer.
3. Discretionary or "Excessive" Living Expenses
When the IRS reviews your monthly budget (Form 433-A), they don't care what you actually spend; they care what is "Necessary."
- Common Rejections: High private school tuition, luxury car payments, and large voluntary charitable contributions are often "disallowed." The IRS may add that money back into your "disposable income," making it look like you have more money to pay taxes than you really do.
- The Fix: Align your reported expenses with the IRS National and Local Standards for housing, utilities, and transportation.
4. Failing to Stay Current with "Estimated Payments"
If you are self-employed or a business owner, you must stay current with your 2026 estimated tax payments while your application is pending. If you skip a current quarterly payment while trying to settle old debt, the IRS will likely view you as a "future risk" and deny your application.
- The Fix: Treat your current year taxes as a priority. Showing the IRS that you have "fixed the problem" that led to the debt makes them much more likely to approve your relief request.
5. Previous Default on a Payment Plan
If you were on an installment agreement before and stopped paying, the IRS becomes much more skeptical. A history of "defaulting" can lead to a rejection of a new, more favorable plan.
- The Fix: You must provide a "Reasonable Cause" for the previous default (such as a medical emergency or job loss) and demonstrate that your financial situation has stabilized enough to handle a new agreement.
Was Your Application Rejected?
A denial letter from the IRS isn't the end of the road. You generally have 30 days to appeal a rejection. Whether you need to fix a math error or argue for "special circumstances," we can help you navigate the Fresh Start Appeals Process.
