If you owe the IRS back taxes and can’t immediately pay off your full tax debt, you can submit an “offer” for the IRS Offer in Compromise (OIC) program. An Offer in Compromise is a special IRS tax relief program that lets you resolve your entire tax debt for less than the total tax amount you owe. Once your OIC has been accepted, you need to make sure you don’t default on its ongoing requirements to prevent the IRS from collecting the money again that the OIC forgave.
Here’s helpful information to keep your OIC in good standing with the IRS.
How do I keep my Offer in Compromise in good standing?
1. Continue to file tax returns on time
The primary reason why an OIC defaults is the failure by a taxpayer to continue to file tax returns on time. Once the IRS has accepted an Offer in Compromise, some taxpayers wrongly assume it is the end of the OIC process. However, even after getting your OIC accepted, it is essential that you remain in tax compliance for the next five years. This implies that:
- You must file your tax returns on time, including by extension deadlines
- You must also pay any new tax due by the standard deadline, even when you have filed for an extension
2. Pay any new taxes due by the standard tax return deadline
You should also pay any new taxes you owe the IRS by the tax return deadline to avoid unintended consequences. Failure to do so will likely result in the OIC defaulting and your full tax liability being reinstated.
3. Make monthly OIC settlement payments on time
Your Offer in Compromise can also default if you fail to make the monthly OIC payments for your settlement amount. Several months after an Offer in Compromise is accepted, a taxpayer may find the payment they committed to making is no longer affordable due to financial constraints, leading to a default. It is common to submit an OIC with the least number of months to avoid defaulting on an OIC and having to start all over again.
4. Return any tax refunds you mistakenly received
Another reason for defaulting an OIC is failure to return any tax refunds you mistakenly received within the provided 30-day period. Notably, an essential requirement to having your Offer in Compromise accepted is that the agency keeps any tax refunds due for the specific tax year in which the OIC is accepted. If you receive an improperly issued tax refund, it is vital that you return it within 30 days.
What happens if my OIC defaults?
Once your OIC defaults, the IRS typically sends a notice via mail informing you of your Offer in Compromise default. The IRS default notice also gives you a chance to respond in writing, explaining the reasons for the default. If the IRS concludes the reasons for default are insufficient or incorrect, they can move your full tax debt back into collections.
Once you receive the notice stating that your OIC is in danger of defaulting, correct the issue right away. You have 30 days to respond to your IRS OIC default notice. Write a letter explaining why your OIC defaulted and include any financial information and documents you want the IRS to review in detail. Mail your letter with the bottom portion of the OIC default notice and allow 30 days for the IRS to reply.
If the IRS moves my tax debt back into collections, will they extend the Collection Statute Expiration Date?
Once the IRS moves your tax debt back into collections, it will calculate how long the Collection Statute Expiration Date (CSED) should be extended. This means that the amount of time the IRS had to collect on your back taxes before you submitted your Offer in Compromise will be extended for the time between when you submitted your OIC and the OIC’s default date.
Will the IRS also add more penalties and interest to my tax debt?
Apart from extending the Collection Statute Expiration Date, the IRS will also impose additional penalties and interests that you accrue on your tax debt between the day you submitted the OIC and the time your OIC defaulted. The agency will then add all these penalties and interest to your total tax debt.
Can I submit a new OIC?
Defaulting on an OIC can have far-reaching consequences and regrets. However, if your OIC defaults, you’re able to submit a new Offer in Compromise. Typically, your new OIC will be based on your current financial standing and not the financial situation used for your first submission.
How Can Wiztax Help?
Have you defaulted on an existing offer? Do you need to submit an new OIC? Just general questions related to the Offer in Compromise program? Call us today at (866) 568-4593 to learn more about how we can help, or start here to take our free online evaluation.
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