How an Offer in Compromise (OIC) interacts with future tax liabilities
An Offer in Compromise resolves the specific tax liabilities listed in the accepted offer, but it does not eliminate your obligation to file or pay taxes that accrue after the acceptance date. In plain terms: an OIC clears the agreed-upon past debts only if you meet the terms of the agreement — and one of the most important terms is remaining compliant with future tax obligations for the OIC compliance period (usually five years). IRS guidance on OIC compliance is explicit about the requirement to remain current on tax filings and payments.
Below I explain how future liabilities are treated, the consequences of noncompliance, practical steps to protect yourself, and alternatives when an OIC isn’t the best solution.
What the OIC actually covers
- The OIC applies only to the tax periods and liabilities specified on the accepted Form 656 and related schedules. It does not operate as an ongoing waiver of taxes that you incur after acceptance.
- Any new taxes you owe after the effective date are separate liabilities. You must continue to file timely returns and pay new tax bills when due.
This is confirmed in the IRS Offer in Compromise brochure and Form 656 instructions, which note that future compliance is a condition of an accepted offer (see IRS, Offer in Compromise Overview).
Compliance requirements and the typical five-year window
When the IRS accepts an OIC, the taxpayer must remain compliant for a period the IRS specifies — typically five years. Compliance generally means:
- Filing all required federal tax returns on time for the compliance period.
- Paying all taxes in full and on time during that period (including extensions or estimated payments as applicable).
If you fail to stay compliant, the IRS can default the OIC and may reinstate the original liability (less any amounts already applied under the OIC). The reinsatement can bring back penalties and interest that would have otherwise remained limited under the negotiated settlement. The risk of reinstatement is one reason the IRS emphasizes that an OIC is not a permanent immunity from future taxes.
Reference: Form 656 Booklet and IRS Offer in Compromise pages describe default and reinstatement procedures (IRS Form 656 Booklet, pub. p656.pdf).
What happens to liens and levies after an OIC?
- A Notice of Federal Tax Lien (NFTL) filed before an accepted OIC is not automatically released in every case. The IRS may withdraw or release a lien if it is appropriate under their procedures, but liens often remain until the terms of the OIC are satisfied or are otherwise resolved. IRS guidance explains lien considerations and conditions for withdrawal or release.
- If the accepted offer is paid in full (for example, lump-sum payments or the installment terms of an accepted offer are met), the IRS can take steps to release the NFTL. If the OIC defaults, any previously released or withdrawn lien can be refiled where permitted.
Because lien treatment depends on facts and timing, I advise clients to discuss lien withdrawal strategies with their tax adviser early in the process.
How interest and penalties are handled with respect to future taxes
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The OIC settles only the amounts specified in the accepted agreement; interest and penalties accrue on new tax liabilities the same as they would for any taxpayer. The IRS will not apply OIC concessions to taxes incurred after the acceptance date.
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If the OIC is defaulted for noncompliance, the original balance may be reinstated with applicable interest and penalties from the original assessment dates unless the IRS adjusts them under a specific policy.
Practical steps to prevent future liability problems (in my practice)
- Keep filing: Ensure all federal returns are timely filed for the compliance period. If you use paid preparers, confirm that they’ll handle future filings and notify you about payment obligations.
- Make timely payments: Pay estimated taxes and withholdings on schedule. If cash flow is tight, consider short-term alternatives (see next section). Paying current taxes on time is often cheaper than risking OIC default.
- Build a cash buffer: After an OIC, prioritize building 3–6 months of essential cash flow to cover payroll tax and estimated tax obligations. In my practice I’ve seen clients avoid defaults simply by reserving a small monthly “tax buffer.”
- Monitor notices: Don’t ignore IRS notices post-OIC. They can indicate missing returns, due payments, or potential defaults. Respond quickly and document communications.
- Keep accurate records: Maintain income and expense documentation to quickly address any discrepancies if the IRS questions post-OIC returns.
When to consider alternatives instead of an OIC
An OIC is not always the best choice. Common alternatives include:
- Installment Agreement: If you can afford monthly payments, an installment agreement may be more appropriate. See our guide, When an Installment Agreement Is Better Than an Offer in Compromise, for a side-by-side comparison.
- Currently Not Collectible (CNC) status: If you have no ability to pay and no realistic prospect of payment, CNC may temporarily stop collection activity while the tax remains due.
- Bankruptcy: In rare cases, some tax debts may be dischargeable in bankruptcy. Consult a bankruptcy attorney.
For guidance on valuation and how the IRS computes an acceptable offer (Reasonable Collection Potential), read How an Offer in Compromise Is Valued by the IRS.
Internal resources (FinHelp):
- How an Offer in Compromise Is Valued by the IRS: https://finhelp.io/glossary/how-an-offer-in-compromise-is-valued-by-the-irs/
- When an Installment Agreement Is Better Than an Offer in Compromise: https://finhelp.io/glossary/when-an-installment-agreement-is-better-than-an-offer-in-compromise/
- Preparing the Financial Statement for an Offer in Compromise: https://finhelp.io/glossary/preparing-the-financial-statement-for-an-offer-in-compromise/
Real-world examples (illustrative, anonymized)
Example A — OIC acceptance but later tax shortfall:
A freelance taxpayer settled a $45,000 payroll/tax liability with a $12,000 OIC. Two years later they miscalculated quarterly estimates and incurred $8,000 of new tax liability. Because they missed two subsequent returns, the IRS moved to default the OIC. The taxpayer negotiated a short-term installment plan to cure the missed returns and avoided reinstatement by quickly restoring compliance.
Example B — OIC acceptance and steady compliance:
A small business owner accepted an OIC and established a simple bookkeeping routine for future payroll and estimated taxes. Staying current for five years prevented any default and the taxpayer rebuilt creditworthiness and access to financing.
These scenarios underline that staying current on future taxes is usually more important than the dollar savings from the original OIC.
Frequently Asked Questions
Q: Does an accepted OIC reduce my future tax bills?
A: No. An OIC resolves past, specified liabilities only. Future taxes must be filed and paid as they come due.
Q: How long must I remain compliant after an OIC?
A: The IRS typically requires five years of compliance after acceptance. During that time you must file returns and pay taxes on time. See IRS Offer in Compromise instructions for exact terms.
Q: If I default on an OIC, can the IRS reinstate the full original liability?
A: Yes. The IRS may reinstate the original balance (reduced by any amounts actually paid under the OIC) and may apply penalties and interest according to standard rules.
How to decide whether to apply for an OIC now
Consider an OIC if your Reasonable Collection Potential (RCP) — the IRS’s estimate of what they can collect from your assets and future income — shows you cannot pay the full amount and other options aren’t viable. Preparing a candid, documented financial package (Form 433-A/B or similar) increases your chances of a correct valuation. See Preparing the Financial Statement for an Offer in Compromise for a walkthrough.
Final professional guidance and disclaimer
In my experience advising taxpayers, an accepted OIC can provide critical relief from crushing tax debt — but its long-term benefit depends on your ability to remain compliant with future filing and payment obligations. Before submitting an OIC, model your cash flow for at least five years and speak with a qualified tax professional who can help forecast post-OIC obligations and negotiate lien issues if needed.
This article is educational and does not replace personalized legal, tax, or financial advice. For specific guidance related to your circumstances, consult a licensed tax professional or attorney.
Key sources and further reading
- IRS — Offer in Compromise Overview: https://www.irs.gov/payments/offer-in-compromise
- IRS — Eligibility for Offer in Compromise: https://www.irs.gov/individuals/offer-in-compromise
- IRS — Form 656 Booklet (Offer in Compromise): https://www.irs.gov/pub/irs-pdf/p656.pdf
(Last reviewed: 2025)
