If you have an outstanding tax balance that you are unable to pay in full, an Offer in Compromise (OIC) agreement with the IRS can provide much-needed relief, allowing you to settle your tax debt at a more manageable level.
[UPDATE: See the NEW policy on OIC Tax Refunds, as of November 2021.]
But what happens to your tax refund when you enter into an Offer in Compromise with the IRS?
We will answer this plus other common questions about an Offer in Compromise and how it affects tax refunds.
What Is an Offer in Compromise (OIC)?
An Offer in Compromise (OIC) is a tax relief program created by the IRS for taxpayers whose outstanding tax balance is more than they can pay.
A taxpayer who is approved for an OIC can settle their tax debt at a lower amount, and they are often permitted to make installment payments toward that amount rather than being expected to pay it all at once.
To determine the reduced amount a taxpayer must pay under an OIC, the IRS reviews a number of factors, including the individual or couple’s household income, other assets, and expenses.
Will I Receive a Tax Refund After My Offer in Compromise Is Accepted?
You will probably not receive a tax refund the year the IRS accepts your Offer in Compromise. As part of the OIC agreement, the IRS will keep your refund for the year the Offer and Compromise is accepted and apply it toward your outstanding tax balance.
For instance, if you applied and were accepted for an OIC in the tax year 2021, you would not receive a tax refund in early 2022, as that refund would apply to your taxes from 2021. However, you will be able to receive refunds in future years.
Why Didn’t I Receive a Tax Refund After My Offer in Compromise Was Accepted?
You did not receive a tax refund after your Offer in Compromise was accepted if it is the first year of your OIC and the IRS kept it to apply toward your outstanding tax balance.
That is part of the agreement when you enter into an Offer in Compromise. While it can be disappointing not to receive a tax refund you were expecting — or even counting on — the amount of your forfeited refund is likely much less compared to how much your tax debt was reduced by the OIC.
Can I Receive a Tax Refund After the First Year of My Offer in Compromise?
Yes, you can start receiving tax refunds again the year after the IRS accepts your OIC. Returning to the earlier example of an Offer in Compromise accepted in 2021, you would be eligible for a tax refund when you file taxes for the year 2022, meaning you would likely receive it in early 2023.
Is My Tax Refund Part of My Offer in Compromise Payment?
Your tax refund that the IRS confiscates after accepting your Offer in Compromise is not part of your OIC payment. It gets applied separately to your outstanding tax balance. However, as previously mentioned, this only happens the first year.
Can a Future Tax Refund Be Applied to My Offer in Compromise Balance?
Absolutely. You may make a written request to the IRS to apply all or a portion of any future tax refunds to your Offer in Compromise balance.
Unlike the initial refund that the IRS withholds, any future refunds that you voluntarily give up will be applied to the actual OIC balance and not your total outstanding tax debt.
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