What legal effects does entering into an Offer in Compromise have on a taxpayer?

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What legal effects does entering into an Offer in Compromise have on a taxpayer?

Form 656, Offer in Compromise, which is prescribed by the IRS for offers in compromise, states that entering the agreement has the following effects on the taxpayer:

  1. The government can keep all tax payments made, received or applied to the amount being compromised before the offer was submitted. The IRS may keep any proceeds from a levy served before the submission of the offer.  If an installment agreement exists, the taxpayer is not required to make payments during the consideration of the offer. The IRS does not apply installment agreement payments against the amount offered.  If the offer is not accepted, and the taxpayer does not incur any additional tax, the installment agreement with the IRS will be reinstated.
  2. The taxpayer will have no right to contest in court or otherwise the amount of the liability sought to be compromised.
  3. If the taxpayer fails to meet any of the terms and conditions of the offer and the offer defaults, the IRS can

1. proceed immediately by suit to collect the entire unpaid balance of the offer;

2. proceed immediately by suit to collect an amount equal to the liability sought to be compromised, minus any payments already received under the terms of the offer,

3. disregard the amount of the offer and apply all amounts already paid under the offer against the original amount of the liability; and/or

4. file suit or levy to collect the original amount of the liability, without further notice of any kind

Form 656 states that the taxpayer agrees to comply with all the provisions of the Code relating to the filings of returns and the paying of taxes for a period of five years following the acceptance of the offer in compromise. The IRS keeps any refund, including interest, owed the taxpayer for tax periods extending through the calendar year that the IRS accepts the offer. The taxpayer cannot designate such a refund to be applied to estimated tax payments for the following year.

If the taxpayer files for bankruptcy before the terms and conditions of the offer are completed, any claim filed by the IRS in the bankruptcy proceeding is treated as a tax claim. If the taxpayer files for bankruptcy after acceptance of the offer, the IRS will not default the offer or solicit payments while the taxpayer is in bankruptcy.