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Taxation & Estate Planning: IRS and the Law
What happens if the IRS accepts my offer in compromise, but then I have trouble staying current on my taxes?
This is frustrating, and has happened to my clients in the past. The IRS does not want the compromise to default any more than you do. The IRS wants to give you an opportunity to remedy a potential default in an already accepted compromise.
There are three primary ways the IRS will consider defaulting an already accepted offer in compromise:
1. You failed to make timely payment of the amount due under the terms of the offer;
2. You have not abided by the compliance provisions of the compromise. The IRS imposes a five year probation as a condition of the compromise. All taxes must be paid and filed on time (extensions are permissible) for five years after the compromise is accepted.
3. You mistakenly received a refund after the offer was accepted, and failed to return the money to the IRS. Terms of an offer require that any refunds be kept by the IRS for any year in which the compromise was pending.
In most default situations, the IRS will first send you a letter notifying you of a potential default. This is done by IRS guidelines. The Internal Revenue Manual, at Section 184.108.40.206, states that in potential default scenarios the offer in compromise unit “will make an attempt to secure compliance. If the taxpayer fails to comply with any requests for delinquent returns and/or payment,” the offer be defaulted.
Recently, the IRS audited one of my client’s tax returns within a year after they accepted a compromise from him. My client could not immediately pay the balance due from the audit, and the IRS sent a notice of potential default on the compromise. We were able to negotiate an extension of time to pay the tax due from the audit, avoiding immediate default of the offer. The IRS was reasonable in this regard in working with the client to salvage the compromise, but it helped that the client was able to raise the funds to pay the tax due from the audit in a reasonable amount of time.
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