IRS Offer in Compromise Default: What Happens If You Don’t Pay?


What to do when you have an IRS Offer in Compromise Default

In this case, the taxpayer, "George" gave our office a call in 2010. He told us a story about how a Revenue Officer came to his house to collect back taxes from 1997-1999. He thought he had settled the debt with an Offer in Compromise that he paid in full in 2001. He didn't understand why this IRS Offer in Compromise Default could be happening, and thought that it was a cruel joke.


Why the zombie tax debt came back to life

We investigated his case, performed our standard diagnostics and asked him a few questions. We noticed he didn't file his taxes in 2004 and asked him why. He said that after taking business expenses into account he made no money that year and thus thought, erroneously, that he didn't have to file taxes.


We then reviewed his history with the IRS and saw that the IRS sent him a notice a year ago. One that said that if he didn't file a tax return, the IRS would put into effect the Default and bring back the entire $100,000 in tax debt he settled in 2000 for $13,000. This notice gave him 30 days to respond. We asked him about that. He said he never received that notice so he never responded. George told us that he changed addresses after a divorce, never alerting the IRS until recently. He reasons his ex-wife likely threw the notice out.


This is the rule you need to know: After an Offer in Compromise is accepted, you must be "good" for 5 years afterward. This rule is stated on the IRS Offer in Compromise Acceptance letter. Being "good" means (1) filing all tax returns when required to do so, and (2) not running up any new IRS tax debts. In George's case, the IRS activated the Default because he didn't file a tax return for 2004.


Bonus Fact: George's income was $300 net profit in 2004. If he had made $300 as a W-2 employee, he would not have had a filing obligation, so failing to file in 2004 should not have defaulted the agreement. The lesson:  Even if you don't think you need to file your taxes, it may be a good idea to do so anyway. 


How we killed the zombie tax debt for good

Because George was so quick to hire us, we had a Collection Due Process appeal that we could use. On the negative side, George's assets were now way too high to get another Offer in Compromise accepted (plus his default could be problematic). We explained the situation to the Appeals Officer, and he had sympathy for George. We then submitted our financial documents that showed that while George had some assets, his cash flow was so uncertain that he could not make steady payments to the IRS.


The good news is that our research indicated that the IRS only had a limited amount of time to collect on the debt. One thing that can happen is the IRS can get more aggressive on collecting tax debts as the collection expiration date gets closer. Fortunately, we convinced the appeals officer to weigh in on the equity of the case and the fairness. He agreed to place George in a hardship status. Less than a year later, the statute of limitations on the tax debt expired, and the entire debt was extinguished.


George felt relieved, and honestly so did we.  What we learned is that there is easy protection from zombie tax debts. As long as you always file your taxes and do not run up new tax debts, your world should remain relatively zombie-free.


But even if we lost,  we still would have at last one more move!


You can actually compromise an Offer in Compromise you can't afford to pay. Read more about this here.




If you find yourself in a tax mess, contact us to schedule your free, confidential consultation.