The IRS has the discretion to just accept a proposal in compromise (OIC) or to launch refunds it will in any other case apply in opposition to taxpayers’ tax money owed via an offset bypass refund (OBR). To assist taxpayers experiencing hardships TAS collaborated with the IRS to take away limitations for taxpayers contemplating the OIC program. Efficient November 1, 2021, IRS modified its coverage permitting taxpayers to maintain their tax refunds as soon as the IRS accepts their OICs and permits sure taxpayers to hunt OBRs whereas their OICs are pending the IRS’s consideration.
What’s an Supply in Compromise?
An OIC permits taxpayers to settle their tax debt for lower than the total quantity owed. An OIC primarily based on doubt as to collectability, one of many three kinds of OICs, permits taxpayers who’re unable to totally pay their liabilities to pay a lesser quantity, after the IRS conducts a monetary evaluation, (capacity to pay; revenue; bills; and asset fairness) and determines if the taxpayer has provided the cheap assortment potential. Being in a financially precarious place a lowered tax legal responsibility with finality is a welcome reduction and for a lot of it’s the capacity to begin over.
New Supply in Compromise Coverage
TAS and the IRS collaborated on two vital modifications to the OIC refund offset coverage. First, for gives accepted on or after November 1, 2021, the supply in compromise refund recoupment course of, defined beneath, will not be relevant for tax durations included on the Type 656. And second, whereas refunds should be offset through the time an OIC is pending, the IRS agrees that taxpayers could search an OBR throughout this era, the place warranted, by contacting the IRS at 800-829-1040.
First Change: Not Making use of Present 12 months Refunds to the Agreed-Upon Tax Legal responsibility
Taxpayers submit an executed Type 656, Supply in Compromise, for the IRS to think about their OIC. As soon as acceptance by the IRS, it turns into a authorized settlement binding the taxpayer and the federal government to a settlement for an quantity lower than what’s legally owed. A TC 780 is positioned on the taxpayer’s account on the IRS data to point out the date the supply was accepted. At present, web page 5, part 7(e) incorporates the next recoupment provision:
The IRS will maintain any refund, together with curiosity, that I is likely to be due for tax durations extending via the calendar 12 months by which the IRS accepts my supply. I can not designate that the refund be utilized to estimated tax funds for the next 12 months or the accepted supply quantity. If I obtain a refund after I submit this supply for any tax interval extending via the calendar 12 months by which the IRS accepts my supply, I’ll return the refund inside 30 days of notification. (emphasis added)
Nevertheless, efficient November 1, 2021, the IRS will not offset, or recoup refunds for the calendar 12 months by which the OIC was accepted. It is going to not apply that refund to the excellent tax legal responsibility for the 12 months(s) included within the OIC settlement, Type 656. For instance, assume the IRS accepts a taxpayer’s OIC to settle liabilities for tax years (TYs) 2017 and 2018 on December 15, 2021. Underneath the brand new steerage, the IRS will not offset the refund proven on the taxpayer’s TY 2021 return and apply as a fee to the TYs 2017 and 2018 liabilities topic to the OIC settlement. For a lot of taxpayers, this one change might be the distinction of even making use of for an OIC.
For taxpayers dealing with an financial hardship, the anticipation of a refund could be the security pin holding collectively a household’s capacity to satisfy fundamental residing bills, particularly for taxpayers counting on the Earned Revenue Tax Credit score (EITC) or the Extra Little one Tax Credit score (ACTC) that Congress supposed for subsistence of low-income taxpayers. For these dealing with an unanticipated detrimental change of their monetary scenario or whose lives spiraled resulting from COVID-19, pure catastrophe, or different causes, shedding a tax refund could gas monetary chaos and go away the taxpayer unable to satisfy fundamental residing bills. An accepted OIC could result in monetary safety. TAS Analysis reveals that of OIC submitters in fiscal 12 months (FY) 2019, near 13 p.c had claimed EITC the earlier 12 months, and roughly 40 p.c had the low-income indicator (LII) on their account. In FY 2020, near 11 p.c had claimed EITC the earlier 12 months, and roughly 40 p.c had the LII on their account. Taxpayers who’re ineligible for EITC could nonetheless obtain a refund of their extra wage withholding. Roughly 48 p.c of TY 2019’s OICs confirmed solely W-2 revenue, and nearly 44 p.c of TY 2020’s OICs confirmed solely W-2 revenue.
Till the Type 656 is up to date eradicating the recoupment provision for the 12 months of supply acceptance and modifies it to mirror that offset will proceed below IRC § 6402(a) prior to supply acceptance, the IRS will present the taxpayer a discover of this modification to the supply phrases.
As a part of its replace to Type 656, it’s anticipated that the IRS would require taxpayers to agree that they won’t file an amended return for tax years included on the Type 656 and return any refunds they obtain if an amended return is filed for tax years earlier than OIC acceptance. As well as, any refunds associated to an amended return filed for a tax 12 months which has an ending date prior to supply acceptance shall be offset to the tax legal responsibility. If taxpayers obtain a refund prior to supply acceptance or primarily based on an amended return for any tax durations extending to the date my supply is accepted, taxpayers will return the refund inside 30 days of receiving the refund.
To forestall potential gaming of this favorable change, the IRS’s Interim Steerage on Refund Recoupments has an exception to its revised offset procedures. If a taxpayer and the IRS execute the OIC primarily based upon info identified on the time of the settlement and the taxpayer subsequently recordsdata an amended return requesting a refund for a 12 months not coated by Type 656, the IRS could however offset that refund. I consider the logic is the IRS was not conscious of the refund or that asset on the time it negotiated the settlement, and that asset ought to have been thought of, and as such shall be utilized towards the taxpayer’s legal responsibility. The steerage offers the next instance:
“A proposal in compromise is accepted November 15, 2021 for tax durations 2017 and 2018. The taxpayer well timed filed a return for tax 12 months 2020 with a stability due of $500 that was full paid with the return. The return was assessed (TC 150) on October 15, 2021. On January 15, 2022, the taxpayer recordsdata an amended 2020 tax return displaying a refund of $10,000. On this occasion, for the reason that refund is attributable to an amended return for a tax 12 months not included on the Type 656, the refund offset should happen.”
Offset Bypass Refund Is a Highly effective Device for Low-Revenue Taxpayers
The IRS could offset a taxpayer’s refund and apply it to a federal tax legal responsibility, per IRC § 6402. Whereas this authority is discretionary, the IRS should offset refunds when the taxpayer owes every other federal debt or state tax legal responsibility. Nevertheless, the IRS can forego the offset and difficulty the refund if the taxpayer solely has a federal tax legal responsibility and is experiencing financial hardship, which is why the IRS refers back to the refund as an OBR (for offset bypass refund). An OBR typically is feasible solely earlier than the IRS applies the present refund to a previous legal responsibility tax and relies upon establishing hardship (for instance, if the person must pay a utility invoice to keep away from disconnection). As soon as the quantity of the hardship is established the IRS will solely bypass sufficient of the offset to alleviate the hardship quantity. For instance, if a taxpayer has a refund of $4,000 and excellent tax liabilities in extra of the $4,000, below regular procedures the IRS will apply the whole refund in the direction of the prior legal responsibility leaving the person with none obtainable refund to be issued. The OBR procedures are an exception to that refund offset and offers quick reduction to these taxpayers experiencing a monetary hardship. If the taxpayer established a hardship of $1,000. The IRS will difficulty a $1,000 fee to the taxpayer and offset the stability, $3,000, and apply to prior liabilities. The OBR process isn’t a widely known choice and there’s a very restricted time by which the taxpayers can request the OBR and set up their hardship quantity.
Second Change: For Hardship Conditions the OBR Treatment Is Now Accessible Throughout the Pendency of an OIC
For taxpayers who had submitted an OIC, the OBR treatment was unavailable to them, as was the flexibility to retain refunds proven on their tax returns for the calendar 12 months the IRS accepted the OIC. Underneath the brand new procedures the IRS is permitting qualifying taxpayers experiencing monetary hardship to hunt OBRs whereas their OICs are pending the IRS’s consideration. These people would be capable to retain their tax refunds so long as they meet the standards within the Inside Income Handbook.
Time is of the essence when requesting an OBR because the request have to be obtained by the IRS previous to the posting date of the offset. Taxpayers ought to contact the IRS instantly upon the submitting of their return in the event that they wish to discover whether or not they’re eligible for an OBR and supply supporting paperwork displaying the hardship. As soon as an offset happens, it typically can’t be “undone” requiring quick motion by the IRS.
Presently, the IRS has no kind to request an OBR. And a search of the IRS’s web site is not going to discover any direct references to both “OBR” or “Offset Bypass.” And whereas the Inside Income Handbook (IRM) offers steerage to workers on processing OBRs, most taxpayers are unlikely to stumble throughout the advantages or necessities of the OBR program. The IRM directs taxpayers to the IRS, which taxpayers could attain by calling 800-829-1040. Help can also be obtainable from TAS.
My hope is these change in coverage will encourage extra taxpayers to hunt OICs, which may enhance their monetary well being and tax compliance going ahead by placing their previous liabilities behind them and I applaud the IRS for its current coverage change helping taxpayers dealing with monetary difficulties. We proceed to encourage the IRS to supply academic materials on IRS.gov explaining the advantages of OBRs, the financial hardship necessities, and what taxpayers must do to well timed request an OBR. With the upcoming submitting season, we encourage the IRS to get the OBR message out by leveraging its relationships with the general public via the Stakeholder Partnerships, Training, and Communication group. Moreover, the IRS ought to embody particulars of the OBR program on its webpage together with the time urgency of the request and the knowledge essential to exhibit the monetary hardship in its coaching supplies for the volunteers who put together tax returns via the Volunteer Revenue Tax Help and Tax Counseling for the Aged packages. These volunteers might educate taxpayers and share info on the OBR program throughout return preparation or submission.