An Offer in Compromise is a great opportunity for a taxpayer to settle his or her back tax liabilities with the Internal Revenue Service (IRS). The government offers tax settlement programs with the purpose of providing a taxpayer with a fresh start, and the expectation that the taxpayer will pay his or her taxes on time from here on out. In order for these goals to be met, the IRS has attached some terms and conditions to accepted Offers that Taxpayers need to be prepared to follow:
IRS Keeps Refunds
The taxpayer should be aware that the IRS will keep any tax refund that may be due to the taxpayer for the year before and the year in which the Offer in Compromise is accepted. Any refunds thereafter will go to the taxpayer.
Remember to Make Your Payments On Time
The taxpayer must fulfill the payment terms of an Offer in Compromise. Whether the taxpayer chooses a lump sum payment or a Short-Term Deferred payment, the taxpayer must make all payments due to the IRS on time. Failure to make the required payments timely may cause the taxpayer’s Offer in Compromise to default.
Do Not Repeat the Bad Habits that Got You into IRS Trouble
The IRS requires that a taxpayer remain in compliance with all tax filings for a period of five years after the Offer in Compromise is accepted. Form 656 section V (d) sets out the terms of this probationary period. This section requires that taxpayers file their tax returns on time and pay any monies due at the time the return is filed. If the taxpayer fails to meet the terms of this probationary period the taxpayer may default on the Offer in Compromise.
If a taxpayer defaults, the Offer in Compromise becomes null and void. Once the Offer in Compromise is void the unpaid amount of the original liability will be reinstated along with accruing penalties and interest. Additionally, the taxpayer will be placed back into the IRS collections department and collection activity will begin. The IRS may also file without notice a Federal Tax Lien, and resume collection activity including a levy on income or bank accounts.
Furthermore, the filing of an Offer in Compromise suspends the running of the Statute of Limitation on Collections while the Offer in Compromise is pending. If the taxpayer’s Offer defaults, the IRS will have this additional time to collect the debt from the taxpayer.
A successful Offer in Compromises requires substantial time and effort from both the taxpayer and their tax professional to negotiate. Therefore, it is vital that taxpayers understand the terms and restrictions that follow the acceptance of an Offer in Compromise.