7.3.5 Potential Disadvantages

Possible disadvantages to an OIC include an extension of the 10-year statute of limitation by the pendency of the offer plus 1 year, forfeiture of certain tax refunds, filing of tax liens to protect the IRS’s interests, adverse impact on bankruptcy options, and, if the taxpayer defaults on the offer, reinstatement of the full debt plus penalties and interest.1 An OIC will also preclude a subsequent innocent spouse claim for a tax year covered by the OIC.2 Until recently, even when an OIC was accepted, the IRS could still seize the next year’s tax refund. This policy has now been changed so that no new seizures will occur after the OIC is accepted. 

• 1The IRS will not process an Offer in Compromise for a taxpayer who is in bankruptcy. See Rev. Proc. 2003-71; I.R.B. 2003-36.
• 2I.R.M. 25.15.5.15.