What Does the Five-Year Compliance Period, After an IRS Offer in Compromise is Approved, Really Mean?
Getting an Offer in Compromise approved is a monumental task. It would be extremely devastating it you went through all of that, just to have the Offer in Compromise defaulted. It is absolutely critical that you understand the agreement that you are signing when you sign Form 656.
- An Offer in Compromise is an agreement between you and the Federal Government to settle your back taxes for less than you owe.
- An Offer in compromise is strictly based on numbers; basically, your income versus your expenses and the equity in your assets.
- If you can prove to the IRS you do not have the ability to pay back your taxes in full before the Statute of Limitations expires, then you may be eligible to file an Offer in Compromise. However, it will depend on your Reasonable Collection Potential and how much time is left before Statute of Limitations on the debt expires.
5 Years of Compliance After Your Offer is Accepted
Once your Offer is accepted, you must be in full compliance over the next five years (tax years). There will be a Tax Examiner assigned to monitor your case throughout these five years, so it’s important to understand what the IRS is requesting.
As obtained from the IRS website under Offer in Compromise FAQ’s, the rules clearly state:
1. Once your offer is accepted, additional tax balances cannot be added to the offer and must be paid in full or the offer will default. Note: Installment agreements are not allowed with new balances.
2. If you fail to meet these terms, the IRS may default the Offer in Compromise and reinstate the entire tax liability, less all payments and credits received.
Additionally, when you submit an Offer, you are agreeing to the following as written in the Internal Revenue Manual Section 5.8.9.5.3
[I/we] agree to file and pay all taxes as required by the Internal Revenue Code for five years, including any extensions, from the date of acceptance of the proposed, revised offer. [I/we] further agree to promptly pay any liabilities assessed after acceptance of this revised offer for tax years ending prior to acceptance that are not otherwise included in the revised offer.
Also, stated in IRM Section 5.19.7.2.19.4
Taxpayers agree, as a term of the offer, to comply with all provisions of the internal revenue laws, including requirements to timely file returns and timely pay taxes for the five year period (Tax Years) beginning with the date of acceptance of this offer and ending through the fifth year (Tax Year), failure to do so is a breach of contract and could result in the full debt being reinstated, with any added penalties and interest.