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Category: Tax
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Experience:  CPA with tax experience.
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A few years ago, I filed an Offer in Compromise for several

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A few years ago, I filed an Offer in Compromise for several tax years. The offer was accepted. I was told that once the offer was accepted, those years could not be audited again. Is that true or are there instances where those years can be reaudited?
Thanks for using JustAnswer. After your audit, If you signed a Form 866, Agreement As to Final Determination of Tax Liability, the IRS should not be able to reaudit those years unless they suspect fraud, malfeasance, or misrepresentation of material fact. If it was a Form 906, Closing Agreement on Final Determination Covering Specific Matters, the IRS should not be able to reaudit those specific matters unless they suspect fraud, malfeasance, or misrepresentation of material fact.

The Offer in Compromise (OIC) only affects the liabilities originally included in the OIC. They can re-open an audit for other issues that were not addressed previously in those years if they want to as long as the 3-year assessment statute is still open which runs from the due date of the return or the date you filed the return, whichever is later.

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Customer: replied 7 years ago.
Mr. Knoebel, I never signed Form 906 or Form 866. The only form I signed was Form 656 - Offer in Compromise. Does that allow them to audit those years? In the Offer, there is a statemnt in Section 8(e) that states "I waive and agree to the suspension of any statututory periods of limitation for the IRS assessment of the tax liability for the tax periods identified in item 5 (which gives the years included in the offer). Is that the 3-year assessment you are referring to?
The offer in compromise (OIC) is usually considered a final settlement for the items included in the OIC. But if there are other tax issues that arise (say you forgot to include your wages from your other employer on your tax return or you omitted your interest income), then the IRS can re-open an audit. The 3-year assessment statute will apply to any new assessments after the OIC was accepted. The waiver on the OIC only waived the statute for the prior assessment(s). Here is an excerpt from the IRS manual. The IRS can only rescind the OIC if it there was fraud or a mutual mistake:
  1. A compromise is binding and conclusive on both the government and the taxpayer. In the absence of fraud or mutual mistake, the courts have consistently denied either party recovery of any part of the consideration given when it was properly rendered under a compromise agreement. However, an offer in compromise, which has been accepted under a mutual mistake as to a material fact, or because of the false representations made about a material fact, may be rescinded or set aside.

  2. IRS will prepare a letter to the taxpayer identifying the OIC, advising that the acceptance is rescinded and acceptance letter revoked.

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Customer: replied 7 years ago.
Mr. Knoebel, Thank you for your response. It has been very helpful. I have one additional question for clarification. First some background. The IRS sent me a letter stating that I had not filed some forms that they felt were required for the years that the OIC had been submited and accepted. This new assessment came over 4 years after the OIC was accepted. I provided them with a response to the assessment that I did not file those forms because they were not applicable to me. Can the IRS consider this a mutual mistake and rescind the prevouly accepted offer? Can you provide me with the interpretation / meaning of "mutual mistake".

A mutual mistake is an error of both parties to a contract, whereby each operates under the identical misconception concerning a past or existing material fact.

This would be somewhat rare. The IRS would have had to make an error and you make the same error.
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What forms did the IRS say you didn't file? You say you got a new assessment? They cannot make a new assessment on other items not included in the OIC if it is more than 3 years from the date you filed the return or the due date of the return, whichever is later.

Edited by JKCPA_Alliance ATS on 10/4/2009 at 2:24 AM EST
Customer: replied 7 years ago.
Forms 3520 and 3520A. They assessed a penalty assessment for not filing these forms.The first notice I received from the IRS concerning this assessment was over 4 years after I filed my return and the OIC.
The Form 3520/3520A are considered information returns. These are not considered to be associated with your actual tax return & OIC. The penalty can be assessed if you were liable to file the 3520/3520A and did not file them. I do not think there is a statute on these penalties, so yes, they can go back and assess them for that long ago.

The IRS may have made a mistake, so I suggest you wait and see what they tell you since you said you already replied to them and told them these forms were not applicable to you.

If they do not abate the penalty, then I would suggest you ask them for abatement under reasonable cause: No penalties will be imposed if the
taxpayer can demonstrate that the failure to comply was
due to reasonable cause and not willful neglect.

I am not versed in foreign tax issues, so if you have any questions about the rules on F. 3520/3520A, I'm afraid I'll have you ask someone else.

Thanks for your questions and good luck!
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