Offer in Compromise Default Recovery Checklist
When you default on an accepted offer in compromise by missing a payment, failing to file required tax returns, or violating other agreement terms, the IRS reinstates your full original tax debt with all accumulated interest and penalties. The IRS treats this situation as a breach of the acceptance agreement terms.
Collection activity can resume rapidly once the IRS determines you have defaulted on your offer in compromise terms. Understanding what triggers default and what actions you can take determines whether you can recover from this situation or face immediate enforcement.
How Default Differs From Rejection
Default occurs after the IRS has already accepted your offer in compromise and you fail to meet the agreed-upon terms. Rejection happens before acceptance when the IRS determines your offer does not meet acceptance criteria.
If the IRS rejects your offer, you can appeal within 30 days using Form 13711, Request for
Appeal of Offer in Compromise. After default, your situation involves reinstated tax liabilities and potential collection actions rather than appealing an offer decision. The IRS may levy assets or file suit to collect the entire balance of your original tax debt, less any payments you made under the defaulted offer.
What Causes an Accepted Offer to Default
Your accepted offer in compromise defaults when you fail to meet specific obligations outlined in
your acceptance agreement
- Missing a scheduled payment by the due date stated in your agreement triggers default
proceedings.
- Failing to timely file required tax returns or pay taxes owed during the five-year
compliance period may cause default.
- Failing to comply with collateral agreement terms or not returning a refund mistakenly
issued during the monitoring period may cause default.
Immediate Steps After Missing a Payment
Locate your acceptance letter and Form 656 to confirm the exact payment date you missed and review all agreement terms. Contact the IRS Offer in Compromise unit immediately using the phone number on your acceptance letter to discuss your situation.
Gather documentation that explains why you missed the payment, including bank statements, medical records, or other contemporaneous evidence showing circumstances beyond your control. Continue filing all required tax returns on time, even while addressing the default, because a second compliance failure makes recovery extremely difficult.
Document all communication with the IRS in writing and keep copies of every letter, email, and notice you receive or send. Contact the IRS before sending additional payments to confirm how the IRS will apply those funds.
Prepare a written explanation of what caused the default and propose realistic new terms if you want to request modification of your accepted compromise. The IRS may resume collection activity, including levies and liens, after processing the default.
Payment Terms and Compliance Requirements
Based on your selected payment option, your accepted offer includes either lump sum or
periodic payment terms
1. A lump sum offer requires 20 percent of the total offer amount with submission, and the remaining balance within five or fewer payments after acceptance.
2. Periodic payment offers require the first payment with submission and the remaining payments in monthly installments within 6 to 24 months according to your proposed terms.
3. Unless you qualified for the low-income waiver, the $205 application fee must have accompanied your Form 656 when you submitted your offer.
The IRS monitors your accepted offer for five years from the acceptance date to ensure you comply with all tax obligations. You must file every required federal tax return by its due date, including extensions during this monitoring period.
Full payment of all new taxes owed by their due dates without incurring additional liabilities remains mandatory throughout the five-year period. Filing each tax return on time demonstrates continued compliance and protects your settlement agreement from default. The IRS will not default your agreement solely because you owe individual shared responsibility payments under
IRC 5000A assessed after offer acceptance.
Understanding Collection Due Process Rights
Collection Due Process hearings provide taxpayers with rights before the IRS takes certain collection actions, but these hearings relate to specific levy or lien notices rather than to offer in compromise defaults directly. When the IRS sends you a Notice of Federal Tax Lien Filing or
Final Notice of Intent to Levy after your offer defaults, you have 30 days from the notice date to request a Collection Due Process hearing using Form 12153.
You must file this form in writing to the address shown on your notice because phone requests do not satisfy the filing requirement. The hearing allows you to present your case to an independent appeals officer and explore payment plans or other alternatives before collection proceeds.
Your right to request a Collection Due Process hearing does not arise from the default itself but from subsequent levy or lien notices the IRS issues. The 30-day window begins when the IRS mails the specific levy or lien notice, not when the IRS determines your offer has defaulted.
During a Collection Due Process hearing, you can propose collection alternatives, including installment agreements. You may also propose a new offer in compromise if you meet eligibility requirements. The hearing officer will consider your current financial situation, your compliance history, and whether the proposed collection action balances effective tax collection with your circumstances.
Consequences of Ignoring Default Notices
The IRS reinstates your full unpaid tax liability, including all interest and penalties, when your offer defaults and you do not respond. Collection enforcement resumes through the normal IRS
collection process, which may include
- The IRS may file federal tax liens against your property.
- The IRS may issue levies on your bank accounts or wages.
- The IRS may seize other assets.
- The IRS may offset your federal tax refunds against your outstanding balance.
Your original tax debt amount reduces only by the payments you made under the terms of your accepted offer before default occurred. Unlike installment agreements that may be reinstated after default, a defaulted offer in compromise typically cannot be revived through simple reinstatement procedures.
You must negotiate new payment terms or submit a new offer if you want to resolve your reinstated tax debt through settlement. The IRS may file or re-file a federal tax lien if the liability meets the statutory threshold and collection procedures are followed. Collection actions proceed under standard IRS collection procedures once your offer defaults and the IRS completes the necessary account adjustments to restore your liability to active collection status.
When Professional Representation Becomes Critical
Contact a tax attorney or enrolled agent immediately if you receive default correspondence or believe your offer may be in jeopardy. Professional representation helps you understand your options, prepare necessary documentation, and communicate effectively with the IRS during this critical period.
A licensed professional can evaluate whether you have grounds to request modification of your accepted compromise in rare cases of extreme hardship or special circumstances.
Representatives can also help you prepare for Collection Due Process hearings if the IRS issues levy or lien notices after default.
The IRS may consider modification of an accepted compromise only in rare circumstances involving extreme hardship or special circumstances beyond your control that arose after acceptance. You must remain current with all filing and payment compliance requirements, and you cannot add newly accrued tax periods to the modification request. Modification requests require detailed financial documentation showing your current inability to meet the original agreement terms.
Your tax professional can prepare the necessary financial statements using Form 433-A for individuals or Form 433-B for businesses to support your modification request. Professional guidance protects your financial interests by ensuring you explore all available options before accepting collection action on your reinstated tax debt.
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