Having your Offer In Compromise (“OIC”) accepted by the IRS can feel like such a relief, especially if you are able to pay the settlement amount in a lump sum and not have to worry about payments. However, your OIC can default after it has been accepted. This means that the IRS will be able to begin collecting the money that was forgiven by the OIC. In this blog, we will discuss the reasons why an OIC can default so you can prepare and make sure it doesn’t happen to you.
Reasons For A Default
One of the most common reasons an OIC defaults is the failure to stay in compliance with filing tax returns on time and not incurring new tax debts. When an OIC is accepted by the IRS it is a common misconception that that’s the end of the process, not so. Upon acceptance of the OIC, the taxpayer must remain in tax compliance for the next five years. This means that tax returns must be filed on time, including extensions. In conjunction with this, the taxpayer must pay any taxes due by the April 15th deadline, whether or not an extension is filed. Failure to stay in compliance will result in the OIC defaulting and the liability being reinstated. Also, any payments that were made to the IRS for the OIC will be kept.
Another very common reason why OICs default is that the taxpayer is unable to make the monthly payments for the settlement amount. Unfortunately, using the 24 month repayment terms for an OIC can be somewhat dangerous. No one can predict the future of your particular financial situation. So, if the payment you were able to make is no longer affordable 18 months after the OIC was accepted, you may find yourself defaulting on your OIC and starting all over. This is the main reason why it is recommended, if possible, to submit an offer with the least amount of months to pay the tax debt.
A less common reason for defaulting an OIC, but one that many people may not know about, is failure to return a tax refund within 30 days to the IRS that was improperly issued. One of the stipulations to having an OIC accepted is that the IRS keeps any tax refund due for the tax year in which the OIC is accepted. Many people get confused by this concept thinking that more than one year is being kept so they end up keeping a refund that should actually be returned. Here is an example:
You submit your OIC in Dec. of 2017. You file your 2017 tax return on the due date, April 15th of 2018, and are due a refund of $500. That refund will be kept. The OIC is accepted in Oct. of 2018. When you file your 2018 return the IRS will keep any refund due from that return because that return is for the year the OIC was accepted.
In this example, if the refund for the 2018 return is actually issued to you and you do not return it to the IRS within 30 days, your OIC will default. This is because the OIC was accepted in the year 2018 meaning, any refund for the 2018 tax return is to be kept per the terms of the OIC.
The reasons for an OIC to default are also explained in detail in Offer In Compromise form 656, section 7.
What Happens After The OIC Defaults?
Once the OIC has defaulted, the IRS will generally send you a notice to inform you of the default, giving you a chance to respond and potentially correct the issue. If the reason for default is not corrected, the IRS will move the tax debt back into collections. This is why it’s important to keep your address up to date with the IRS. If the IRS sends the notice of default to an old address and you never receive it, the time frame to respond to the notice does not change. This means you would not only be in danger of defaulting on your OIC but, you would also not be aware of the default. This could mean that the next time you’re made aware of the balance being owed is when your employer or bank receives a collection notice.
What most people don’t realize is that the IRS is also going to calculate how long the collection statute of limitations should be extended by. Basically, the amount of time the IRS had to collect on the tax debt before your OIC was submitted will be extended for the amount of time between submission of the OIC and the default date. Not only will the IRS extend the statute of limitations, the IRS will also calculate how much in penalties and interest would have accrued on the tax debt between submission of the OIC and the time the OIC defaulted. They will then add these penalties and interest to the tax debt.
Reasons The IRS May Rescind The Offer In Compromise
The IRS rescinding an OIC that was previously accepted differs from an OIC that defaults. Defaulting on an OIC pertains to not adhering to the terms and conditions of the OIC. Rescinding an OIC comes from the IRS finding information that was used to determine the acceptance of the OIC was either false or information that should have been submitted with the OIC was concealed.
If the IRS finds out after they have accepted your OIC that the information you submitted to them was falsified, they can rescind the offer. This would effectively bring back the tax debt that was settled.
Concealing information from the IRS is also a reason for the IRS to rescind an accepted OIC. This would pertain to purposefully trying to hide assets or income sources from the IRS for the purpose of having your OIC accepted. This could pertain to a number of things, whether it be property that you attempt to move out of your name, removing your name from a bank account, etc. In fact, Internal Revenue Code (“IRC”) § 7206(5) specifically outlines the the consequences for falsifying or concealing information from the IRS.
The OIC defaulting does not mean you cannot submit a new OIC. However, your new OIC would be based on your current financial situation and not your financial situation used for your original submission. Upon receiving a notice stating that the OIC is in danger of defaulting, make sure to correct the issue right away. Otherwise, the tax debt you though you had put behind you will become an issue once again. When deciding on whether to pursue an OIC for resolving your tax debt, it is always advisable to speak with a tax professional due to the issues that can arise during the process.