Lets start with the Basics.
1. If you have installed the OT_Customer_Loyalty module You will need to remove it as it breaks paypal.
2. Make sure that your email address matches perfectly with the primary from paypal.
3. Test
4. Uninstall the paypal module through admin, Re-upload ALL paypal files from includes/modules/payment(paypal folder and paypal.php) then in admin modules payment re-install and fill in info
5. Test
6. Check the address in paypal listed for paypal IPN
7. Test
8. At the bottom of the paypal module there is a small text box. there are 2 different urls listed Type in the optional url
9. Test
10. contact your host to verify firewall and blocked ports
11. Test
12. Contact Merlin and see if I can figure it out. ( This is the last resort step as this one costs)