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:
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.
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:
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.
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:
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.
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:
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.
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.