Tax Refunds and Offers in Compromise

Taxpayers who have applied for an Offer in Compromise with the Internal Revenue Service to pay less than the full amount you owe will find that the IRS will retain refunds claimed on their tax returns. The IRS will generally keep refunds on returns filed while their offer is pending and refunds on returns filed after the offer is accepted but apply for the year during which the offer is accepted.

IRS Form 656 has an agreement with taxpayers on their Offer in Compromise covering terms and conditions. The Form states on page 1 as follows: “The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2019 and you file your 2019 Form 1040 on April 15, 2020 showing a refund, the IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer.

Thus, the agreement, in part, is that taxpayers will not receive these refunds and cannot reduce the balance owed on the Offer in Compromise that they have agreed to pay. Furthermore, the refund cannot be applied towards next year’s taxes.

Gene M. Bowman, Tax Attorney

Huntsville, Alabama