Default of an Offer in Compromise

The IRS can treat the taxpayer's failure to pay as a breach of contract and exercise the default provisions of the offer. This means that the IRS can:


(1) reinstate the entire unpaid balance of the offer;



(2) file a Notice of Federal Tax Lien on any tax liabilities without liens;



(3) file suit to collect an amount equal to the original amount of the tax liability as liquidated damages, minus any payments already received under the terms of the offer;



(4) disregard the amount of the offer and apply all amounts already paid against the original amount of the tax liability; or



(5) file suit or levy to collect the original amount of the tax liability, without further notice of any kind (Instructions to Form 656, Offer in Compromise (Rev. February 2007)).


A default on the agreement can have serious consequences, especially if the taxpayer's financial situation has improved. If a new offer has to be made, the taxpayer's previous financial situation at the time of the first offer is no longer relevant. Thus, the IRS could require higher payments on a subsequent offer.