I filed an Offer in Compromise – What Happens to My Refund?
An Offer in Compromise is filed when a taxpayer absolutely cannot pay all the debt owed to the IRS. When an Offer is filed, you are asking the IRS to reduce your debt to an amount you are able to afford and could actually pay off; basically, a fraction of what you owe.
Of course, when you file the Offer you are also allowing the IRS to keep your refunds because, again, you settled for far less than your actual amount owed. Will they keep all your refunds until you are no longer paying taxes? No, but it’s important to know a portion will not be coming back to your bank account. In addition, the refund is not considered as payment toward your Offer.
Your Refunds
Once you have submitted your Offer in Compromise for review, the IRS will keep any refunds or overpayments and apply them to the first year with a balance due or whichever year the CSED will be expiring the soonest. For example, you have balances due for years 2008 – 2012 and have filed an Offer for these years as well. You filed your 2017 tax return with an overpayment of $2,000. You will not be receiving this refund, but instead it will be applied to year 2008 as that is the first year with a balance. Unfortunately, if you prepare the return and find there is an overpayment, you cannot apply this overpayment to the next tax year as an Estimated Tax Payment as the IRS will catch this on your return and apply to, you guessed it, year 2008.
Now, let’s say your Offer in Compromise has already been accepted and you have paid the Offer amount in full. What happens to your refund in this case?
For example, you filed your Offer in June 2015; it was accepted in March 2017 and then paid in full October 2017. Unless you filed an extension and had a refund, the IRS would keep the refund for tax year 2014, 2015 and 2016, if there is an overpayment.
Future refunds for income earned during tax years 2018 and beyond would not be affected. You’ll get those refunds, but you would not receive any still due to you from tax year 2016 or earlier.
The OIC agreement reads in part:
- You agree to let the IRS keep any tax refunds, payments, and credits applied to your tax debts prior to submitting your Offer in Compromise.
- You agree to let the IRS keep any tax refunds, including interest, that would have been payable to you during the calendar year that your Offer in Compromise is approved.
Take Steps Now to Adjust
Before busy tax season starts, it’s best to find out what you believe you may owe. If you are making Estimated Tax Payments, maybe you won’t need to make the 4th payment as then you would have an overpayment. Or, maybe you need to make at least one Estimated Tax Payment to ensure you will not owe as that can have consequences as well. (See our Offer In Compromise Book for more information). There are several ways in which you can do this, such as; contacting a CPA or by visiting www.IRS.gov and reviewing the Tax Table. If you’re not going to get a refund, there’s nothing for the IRS to keep.
So, What’s the Good News?
There are some things you can do now to reduce your tax refund. Yes, it sounds weird that you’d want to reduce your refund, but if you don’t choose to take these steps, you are giving your money to the IRS versus using these examples to benefit yourself as opposed to the government.
One idea is to increase your self-employment taxes if you’re self-employed. It will= reduce your tax refund, but will also actually help a bit in your retirement by increasing your Social Security benefits. The self-employment tax is a combination of Medicare and paying into Social Security.
If you’re not self-employed, you convert part of your traditional IRA to a Roth IRA. Yes, you will need to pay the tax on the conversion, but this can help eliminate your tax refund, and Roth IRAs provide tax-free withdrawals in retirement.
Basically, you would put in the money now, but would have tax-free income in the future.
Please Seek Professional Advice
You most likely will want to consider the advice of a professional and we suggest you do so in cases such as these. A professional knows how the IRS process works along with bringing cases to Appeals, if necessary. Did you know the IRS Internal Revenue Code has more than 10,000 entries and more and more are added each tax year?
Lastly, it’s important to remember when filing for an Offer in Compromise that you are opening yourself and family up to a slew of financial questions from the IRS. They will review everything from your bank accounts to retirement accounts to how many vehicles should be allowed. If you choose to go this alone, please be sure you are 100% prepared as the IRS does not schedule calls but will contact you on a Wednesday afternoon wanting to discuss your Offer. If you are tired and give more or incorrect information, you could be opening your past year tax returns to an Audit as the Agent may feel you are being dishonest or not providing all the information.