Offers in Compromise (“Offers”) remain a vital form of relief for taxpayers who cannot afford to pay their IRS taxes in full. Offers are governed by a strict program whereby qualifying taxpayers may attempt to settle their debt to the IRS based on doubt as to liability or doubt as to collectability. If accepted, the amount offered can be paid in one lump sum or by a periodic payment plan (typically 24 months). Requesting an Offer based on doubt as to collectability (i.e., “I owe, but I do not have the ability to full pay”) requires a taxpayer to meet certain financial criteria, submit specific financial related forms, and potentially negotiate with an IRS Offer Specialist, in addition to other requirements.
As one of the many Offer program conditions, the IRS has historically withheld income tax refunds a taxpayer may be entitled to through the tax year in which the Offer is accepted. That means, if a taxpayer submits an Offer request in 2020 covering tax liabilities for years 2018 and 2019, and the Offer is accepted in February 2021, the IRS would retain any refunds to which the taxpayer is entitled for tax years 2020 (filed in 2021) and 2021 (filed in 2022). The refunds recouped by the IRS are applied to the taxpayer’s outstanding tax liabilities and are not credited against required Offer payments, future estimated tax payments, or even the Offer filing fee. As such, it was important to make sure a taxpayer adjusted his or her income tax withheld or estimated tax payments in the year the Offer is submitted.
One of the purposes of this requirement was to prevent a taxpayer from overpaying their federal income taxes for a subsequent “non-Offer” year in order to manipulate the Offer amount and then later seeking a refund of funds that might otherwise have been added to the Offer. However, the practice also had the unintended effect of causing tax practitioners to advise their clients to underpay their taxes throughout the year, either by adjusting their withholding on wages or reducing their estimated tax payments, in order to avoid having a refund when the income tax return is later filed. Since an Offer may remain pending for several months before an Offer is accepted or rejected, not receiving an expected tax refund may create a hardship to an already financially-challenged individual.
On October 28, 2021, the IRS released a Memorandum (SBSE-05-1021-0063) explaining that, effective November 1, 2021, the IRS will no longer offset refunds of taxes for the year in which the IRS accepts the Offer. For example, if a taxpayer makes an Offer request in 2020 covering tax years 2018 and 2019, and the Offer is accepted in December 2021, the IRS may retain any refund for tax year 2020 (filed in 2021 and due prior to the Offer acceptance) but not for 2021 (filed in 2022).
However, if, after acceptance of an Offer, a taxpayer amends an earlier-year tax return that was not covered by the Offer, the IRS may continue to recoup any refund generated by the amended return filing. For example, if an Offer covering tax years 2017 and 2018 is accepted in December 2021, and thereafter the taxpayer files an amended income tax return claiming a refund for tax year 2019 which was not included in the Offer, the IRS may apply the refund to the taxpayer’s outstanding liabilities.
This policy change is a positive step in obtaining a fair and just result with the IRS, especially for taxpayers who are experiencing financial hardship. Many taxpayers who file Offers may be entitled to a refund because of the Earned Income Tax Credit or Child Tax Credit which are intended to assist taxpayers experiencing financial hardship. This policy change conforms the Offer rules with the government’s purpose of helping low-income taxpayers meet their basic living expenses.
Tax practitioners should be on the lookout for forthcoming changes to the Internal Revenue Manual and various Offer forms reflecting this change. Taxpayers who are interested in learning whether they may qualify for an Offer in Compromise should contact a qualified tax professional for assistance, as Offers can involve a somewhat lengthy, confusing, and complex process. The IRS recently posted an article regarding OIC tax scams to help taxpayers steer clear of scammers who claim to be able to help them with their tax debts while charging exorbitant fees and making outrageous claims. Thus, a tax professional should be knowledgeable about the process, experienced in obtaining resolutions of tax debts, realistic about the fees and costs of obtaining relief, and should not promise results that “sound too good to be true.” For almost 3 decades, tax attorneys at Gensburg Calandriello & Kanter, P.C. have assisted thousands of taxpayers with obtaining resolutions of their tax issues with the IRS and other government agencies, and are qualified and available to help.
Sandra Mertens
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