The 5-Year Compliance Trap: Why IRS Offers in Compromise Get Revoked

You did it. You successfully negotiated with the IRS, and they agreed to settle your $50,000 debt for $5,000. The papers are signed, the payment is made, and the weight is off your shoulders.

But there is a catch.

Under Section 7 of Form 656, every accepted Offer in Compromise (OIC) comes with a "probationary period." If you break the rules at any point during the next five years, the IRS can revoke your settlement, reinstate your original debt (plus years of back-dated interest), and resume aggressive collections.

Here is how to avoid the "Compliance Trap" in 2026.

The "Perfect Compliance" Rule

The IRS views an OIC as a second chance. In exchange for the discount on your debt, they expect you to become a "model taxpayer." This means for the next five years (starting from the date of your acceptance letter):

1. File All Returns on Time: Every federal income tax return must be filed by the deadline (including extensions).
2. Pay All Taxes in Full: You cannot owe a single penny on new tax returns. If you file your 2026 return and have a balance due that you can't pay, your OIC from 2024 could be defaulted.
3. Estimated Payments: If you are self-employed, you must stay current on your quarterly estimated payments.

Common Ways Taxpayers Accidentally Default

1. The "Small Balance" Oversight

A taxpayer files their return on time but realizes they owe $400 more than they thought. They decide to pay it "in a few months."

• The Result: The IRS computer system flags the unpaid balance, and a Letter of Intent to Terminate is automatically generated. The entire settled debt is reinstated.

2. Forgetting the "Future Tax Year"

If your OIC is accepted in October 2026, many people think they only need to worry about the future. However, the rule applies to the entire tax year in which the offer was accepted.

3. Changes in Business Structure

If you settle a personal tax debt but then start a business and fail to pay payroll taxes, the IRS may view this as a breach of your overall "compliance character."

What Happens if Your OIC is Revoked?

If the IRS defaults your offer, the consequences are severe:

• The "Discount" Disappears: The original amount you owed is restored to the books.
• Interest Reinstatement: All interest that would have accrued while your offer was pending is reinstated immediately.
• No Refunds: Any money you have already paid toward the settlement is retained by the IRS and applied to the original balance; it is not refunded to you.

How to Protect Your Settlement

• Over-Withhold: If you are a W-2 employee, adjust your withholdings so you are guaranteed a small refund rather than a balance due.
• The "Safety Fund": Set aside a small emergency fund specifically for future tax bills.
• Annual Check-ups: We recommend our OIC clients check in with us every April for the first three years post-acceptance to ensure their filing is flawless.

A Final Warning on Refunds

Remember: The IRS will keep any tax refund (including interest) you would have received for the tax year in which your offer was accepted. This is not a "default," but a standard term of the agreement.

Was your OIC recently threatened with default? If you've received a notice from the IRS claiming you've breached your agreement, Wolf Tax can often intervene. We can sometimes negotiate a "reinstatement" of the offer if we can prove the non-compliance was due to reasonable cause.