The Offer in Compromise (OIC) program is a valuable
tax problem resolution tool. Taxpayers eligible for an OIC suffer from financial hardship that makes paying the total amount owed and financially surviving impossible. For many, an OIC offers the only path to eliminating tax debt and becoming solvent.
However, the OIC program has come with a requirement that devastates taxpayers living on the edge: They must agree to forfeit a tax refund upon which they depend.
This creates a conflict for those who want to enter into an OIC but need their tax refund for necessities. For example, delinquent taxpayers depending on their upcoming tax refund to pay medical bills may have no choice but to forgo applying for an OIC.
As of November 1st, 2021, the IRS has eliminated this obstacle to applying for an OIC. Now, taxpayers granted an OIC can still receive their full tax refund for the year the government accepts their offer (though exceptions may apply to tax fraud cases).
In addition, they can apply for an offset bypass refund (OBR) while their OIC application is pending, but only in the case of extreme hardship. An OBR allows taxpayers to receive a refund while an offer in compromise is pending, but only up to the amount of the hardship.
What is an OIC?
An OIC is an agreement between the IRS and delinquent taxpayers to settle outstanding debt for less than owed. OICs apply only to past-due taxes. The amounts forgiven can include taxes, penalties, interest, additions to taxes, and any additional amounts required by law. Taxpayers can pay the OIC amount in a lump sum or installments.
The government intends OICs for delinquent taxpayers suffering hardship rather than those who owe money due to tax evasion.
Individual taxpayers and businesses may apply for an OIC. Qualification generally requires meeting one of two standards. Either the taxpayer must present a “doubt as to collectibility” offer by having insufficient income and assets to pay the amount owed, or that “special circumstances” exist such that paying the amount owed would result in an substantial hardship, such as being unable to pay for housing or medical costs.
The OIC application requires taxpayers to submit a $205 application fee and a down payment unless they qualify for low-income certification.
How the IRS Applies the Change in Policy to Taxpayers With Accepted OICs
The policy change requires no action on the taxpayer’s part once the IRS accepts an OIC. Before the change, the IRS would automatically seize any current year tax refund and apply it to the delinquent taxpayer’s balance. Now, upon OIC approval, the IRS places a TC780 on the taxpayer’s account, suspending the refund recoupment mechanism, resulting in the taxpayer receiving his or her full refund.
For example, assume the IRS granted Taxpayer A’s OIC request for 2018 back taxes on December 1st, 2021. Under the old rules, if Taxpayer A is due a tax refund for 2021, that refund would automatically be diverted to pay the 2018 back taxes. However, because of the new policy, Taxpayer A now receives the refund in full.
Applying for an OBR
OBRs, on the other hand, require taxpayer action. Therefore, taxpayers should request an OBR by phone soon after they submit their OIC application.
Anyone applying for an OIC should be advised that processing takes up to two years (at which point the IRS must grant the request if it has yet to issue a decision). Some simpler cases take somewhere between four and nine months. The chances are good that the processing time will overlap with a refund issuance, resulting in refund seizure.
The Importance of the Change
Because of the economic dislocations of the COVID-19 crisis, this change promises to save multitudes of taxpayers from the awful choice of delaying payment of tax debt or facing penury. It also incentivizes delinquent taxpayers to apply for an OIC, which should make the government’s tax collection efforts more successful. Though no action is needed to receive your refund after OIC approval, it is crucial to apply for an OBR immediately after an OIC application, so the IRS has time to approve it ahead of tax refund issuance.
Are you struggling to manage tax debt and looking for a solution? OIC is just one of many tax relief programs for which you may qualify. For expert advice from a tax debt lawyer on which relief programs work best for your situation, contact Brager Tax Law Group.