The Internal Revenue Service (IRS) recently agreed on changes for the upcoming tax season to allow some taxpayers with an Offer in Compromise (OIC) to retain a portion of their tax refund for needed expenses.
An offer in compromise is an agreement between a taxpayer and the IRS to manage a tax liability. The OIC process allows you and the IRS to agree on an amount that you can conceivably pay back to the IRS to satisfy an outstanding debt. There are stringent guidelines around the use of an OIC and it is not a vehicle for simply getting your tax debt excused if you are able to pay it over time in installments. Before agreeing to an OIC, the IRS balances your reasonable collection potential, such as seizure of your assets and property to pay your tax bill. If the deal comes out worse for the IRS, they may agree to an OIC.
Recently, the National Taxpayer Advocate Service (TAS) pressed the IRS for relief for some taxpayers who are relying on their tax refund to pay essential expenses. The TAS is an independent unit that operates within the IRS, on behalf of taxpayers. The TAS offers a variety of education and other services to help taxpayers understand their rights, navigate a notice received by the IRS, or get help with tax disputes.
As a result of the intervention of the TAS, two changes to OIC policy are underway. They are:
- Taxpayers whose OIC are accepted by the IRS on or after November 1, 2021 will see a change in how tax refunds are managed by the IRS. Usually, the IRS can retain the tax refund and apply it against funds owed. The policy change means the IRS will “no longer offset, or recoup refunds for the calendar year in which the OIC was accepted. It will no longer apply that refund to the outstanding tax liability for the year(s) included in the OIC agreement, Form 656.”
- The second change to the OIC policy will allow taxpayers who are experiencing financial hardship to apply for an offset bypass refund while their OIC is being considered by the IRS.
These two provisions are important for taxpayers who are continuing to experience economic disruption as a result of the pandemic or other causes. As with all IRS programs, there are caveats and fine print. If you have questions about OICs, speak with an experienced tax attorney in your area.
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The tax group at Robert J. Fedor, Esq., LLC represents business and individual clients responding to civil or IRS tax audit, offshore tax allegations, or employment tax disputes. When strategic and straightforward tax advice is needed locally or internationally, call 800-579-0997 or contact us for a free consultation. We have offices in Cleveland and Chicago.