Understanding Your Offer in Compromise Tax Refund

Alexandra Tapp
Expert Contributor
Last Updated:
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  • You can lower your tax debt by qualifying for an offer in compromise but must adhere to strict requirements to avoid default.
  • Understand that you won’t receive any tax refund for the period during which the IRS is considering your offer, as well as in the following year
  • If you’re not going to receive a few years’ worth of tax refunds, plan accordingly by adjusting your budget, withholdings, deductions, and investments as needed.

You’ve submitted an offer in compromise to the Internal Revenue Service (IRS), and it’s been accepted. This means the IRS has agreed that you cannot reasonably pay off your entire tax debt and that it’s in both your and their best interest to let you pay a lower amount. You qualify for an offer in compromise one of three ways:

  • Doubt as to Liability. You can prove you owe fewer taxes than the IRS says you do, usually due to a filing or accountant’s mistake.
  • Doubt as to Collectibility. You don’t earn enough income or have enough assets to pay off your tax debt.
  • Effective Tax Administration. You do have enough assets to pay your taxes, but doing so would cause you significant financial hardship.

If you believe you’re eligible for an offer in compromise, you must fill out and submit the appropriate forms and documentation to the IRS. The IRS determines whether you can truly afford to pay your full tax debt or qualify for a lower amount using its reasonable collection potential (RCP) formula. It does so by taking into account your income, assets, and expenses, as documented in the paperwork you submitted with your offer application.

If the IRS does accept your offer, you now owe an agreed-upon lower amount of taxes. However, you need to follow certain rules and regulations to avoid default and to stay in good standing with the IRS going forward. For instance, you have to stay up-to-date on your tax filings and payments for the five years following your offer in compromise acceptance. Further, you don’t get to keep the next year’s tax refund.

Why Don’t You Get to Keep Your Tax Refund?

One of the IRS conditions of an offer in compromise is that it gets to keep your tax refunds while your application is pending, as well as the year following acceptance. It can take the IRS two years to accept or deny your offer. The fine print about tax returns essentially states that:

  • You let the IRS keep all tax refunds, payments, and credits that would have been owed to you before applying for an offer in compromise.
  • The IRS gets to keep the tax refunds owed to you the year after it accepts your offer in compromise.

So if you submitted your offer in 2018, and the IRS accepted it later that year, it keeps any refunds you’d expect to receive in 2019 or from 2017 or earlier. Not only do you forgo your tax refund but it also doesn’t get put toward what you owe the IRS this year or next. Thus, you must plan your finances accordingly. You will, however, continue to receive any refunds for years going forward.

Understanding Your Offer in Compromise Tax Refund

How to Plan Ahead

If you typically expect to receive a return on your taxes, you’ll need to adjust your budget to account for the year or two of offer in compromise negotiations during which you won’t. Other steps you might take include:

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  • Selling investments that make enough money that you’d have to pay taxes on them
  • Switch some money that’s in a traditional IRA to a Roth IRA. As an added bonus, you can withdraw from your Roth IRA tax-free once you retire.
  • If you’re self-employed, claiming fewer expense deductions so you end up paying more self-employment taxes. This can also help increase your Social Security benefits in retirement.
  • Changing the withholding amount on your paycheck or your estimated tax payments to try to lower what you’d get on your refund

Your strategy should be to get your refund as low as possible during this period since the IRS will be keeping it. Fortunately, you should only have to endure one or two years of withheld tax refunds.

Benefits of an Offer in Compromise

Before you get down on the fact you won’t receive your current tax refund, remember the upsides of an offer in compromise. Obviously, it helps reduce the amount of taxes you owe the IRS and relieves some of your financial stress for the time being. Plus, the IRS releases any tax liens filed against you during this time. This can help improve your credit score and free your home and other assets from such liens.

Just know that the IRS does not release these liens until you’ve paid off your entire agreed-upon amount. This could take five months to two years, depending on which payment option you choose:

  • Lump Sum Cash. You must pay 20% of your offer and pay the rest of it in no more than five payments over no longer than five months.
  • Periodic Payment. Here you can take up to two years to pay off your offer in six or more installments.

Who Can Help?

IRS rules and regulations regarding offer in compromise tax refunds and more can be complicated. And you want to make sure you adhere to them to avoid default. Thus, you might want to work with a tax attorney or debt relief company to help you through the process. These individuals can help you file all the appropriate forms and documentation, determine a reasonable offer amount, communicate with the IRS on your behalf, and make the entire process less stressful for you.

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How Much Tax Debt Do You Owe?

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If you need help relieving your tax debt or want to learn more about the offer in compromise tax refund, contact one of Solvable’s professionals. We can also help you avoid tax trouble in the future, so you can stay in good standing with the IRS and keep receiving your tax refunds.

 

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Alexandra Tapp
Expert Contributor
Last Updated: