When you enter into an Offer in Compromise with the IRS, you are negotiating a settlement of your tax liability for less than the full amount you owe. But doing so also means you agree to specific terms and conditions, both during the period when the IRS is reviewing your offer, and for five years after acceptance. Your failure to meet the offer terms may result in the IRS rejecting your offer in compromise, or if accepted, subsequently terminating the offer. This blog examines the offer in compromise terms you should know, explains why they matter, and offers practical tips along the way.
The IRS will Keep your Required Payments Either Way
Submitting an OIC requires a non-refundable application fee and an initial payment, depending on the type of offer you choose. Neither is required if you qualify for low-income certification.
- Lump-Sum Offer: You must pay 20% of the total offer amount when you apply. If accepted, the remaining balance is paid in five or fewer payments within five months of acceptance.
- Periodic Payment Offer: You submit your first installment with your application and continue to make monthly payments while the IRS reviews your offer, even before acceptance.
Even if your offer is rejected, the IRS will keep your application fee, your initial payment, and any required periodic payments you submit while the IRS is reviewing your offer. The payments you make will be applied to your outstanding tax debt. The IRS will decide how to apply your payments to unpaid debts unless you give clear instructions specifying the year and tax debt they should be applied to.
Practical Tip: Before submitting, carefully assess your eligibility. Use the IRS Pre-Qualifier Tool or consult a professional to estimate whether your offer has a realistic chance of success. This can help you avoid losing non-refundable fees, wasting time, and getting your hopes up over an offer that won’t be accepted.
The IRS will Keep Your Refunds
If you are owed a refund while the IRS is considering your offer, they will keep it. If the IRS accepts your offer, any refund due to you in the acceptance year will also be kept by the IRS. You cannot elect to apply these refunds to your offer amount. Future refunds are safe from offset.
Practical Tip: Avoid over-withholding on your paycheck. Review your W-4 allowances and make any necessary changes. If you make estimated tax payments, be sure to calculate them accurately.
Currently Approved Installment Agreement
If at the time of submitting your offer, you have an installment agreement in place, you are not required to make these payments while your offer is being considered.
Why This Matters: Since you are filing an offer in compromise, you most likely cannot afford your monthly installment payments. This will help your cash flow.
The IRS Can Still File a Lien
Many taxpayers believe that filing an Offer in Compromise automatically halts all IRS enforcement actions, but that’s not entirely true. During the review process, the IRS can still file or maintain a Notice of Federal Tax Lien to protect its interest. If the offer is accepted, the lien will be released when you have made all of the required payments.
Why This Matters: A federal tax lien can affect your credit profile, refinancing, and property transactions. Understanding that it may remain in place even after you submit an offer helps you plan for potential financial impacts.
You Must Appeal Within 30 Days
If your offer is rejected, you can request an appeal hearing with the Independent Office of Appeals within 30 days of notification. You can request your appeal by submitting Form 13711, Request for Appeal of Offer in Compromise. If you miss the 30-day deadline, your appeal won’t be accepted.
Why This Matters: If you have made a reasonable offer, we have found that Appeals will accept a rejected offer or propose an offer amount acceptable to you.
Staying in Compliance for Five Years
A critical offer in compromise term is the five-year compliance requirement. Starting from the date your offer is accepted, you must:
- File all future tax returns on time.
- Pay all future tax liabilities in full and by their due dates.
- Avoid incurring new unpaid balances.
If you fail to meet any of these obligations during the five years, the IRS can default your OIC. The IRS will seek to collect the remainder of what you owe, plus accrued penalties and interest.
Practical Tip: Set up a strong compliance routine: mark due dates, file early, pay estimated taxes if required, and keep documentation in case you need to prove you were compliant.
Once Accepted, the Offer is Binding
Once the IRS accepts your offer, you cannot challenge any of the tax debts included in the offer in court, nor can you file a refund claim for any included debts. You remain responsible for your full tax liability until you have met all of the terms of the offer. If you don’t satisfy one or more of these terms, the IRS can collect the full amount of your original liability plus penalties and interest from the date you default.
Individual Offer for a Joint Liability
When you file a joint return with your spouse, you are each liable for any outstanding tax debt. If you submit an offer on your own for a joint liability and your offer is accepted, the other liable party is not released or discharged from the tax debt.
Practical Tip: If your tax debt involves a joint return, talk to a tax professional to understand the implications and how to protect the spouse who does not submit an offer from enforced collection.
Get Help Understanding Offer in Compromise Terms
An IRS Offer in Compromise can give struggling taxpayers a second chance, a real opportunity to clear overwhelming tax debt and start over. But it’s not an easy process, nor is it guaranteed. Success depends on full financial disclosure, patience, and long-term compliance.
Before you submit your offer:
- Understand every term you’re agreeing to.
- Assess your ability to stay compliant for at least five years.
- Get expert guidance if your finances are complex or if you’ve had previous collection activity.
If done correctly, an Offer in Compromise can help you permanently resolve your IRS debt and rebuild your financial stability, but only if you respect and follow the terms that come with it.
For more information on the Offer in Compromise program or other tax relief strategies, call East Coast Tax Consulting Group today at 866-550-7655 to schedule a free consultation with one of our tax resolution experts.