No doubt, the pandemic had an unfortunate economic impact on individuals and businesses alike, causing them to struggle to pay taxes owed to the
The People First Initiative did provide relief for about 3 ½ months as the IRS paused enforcement pursuits, such as filing notices of a federal tax lien and levying wages and bank accounts. However, the IRS could not simply forgive or stop collecting the tax debt still owed by struggling taxpayers. So, policy changes regarding the Offers in Compromise and the Offset Bypass Refund were put in place to help taxpayers that still owe tax debts.
Offers in compromise (OIC)
There has been an OIC program in place for years to help individual and business taxpayers negotiate their tax debt for less than the full amount owed. What’s changed about the OIC program is that now the taxpayer will be able to receive certain tax refunds. The policy as it was before required any tax refunds to be offset or applied to the tax liability for the calendar year tax periods in which the OIC was accepted. If the OIC was accepted sometime in 2020 and a 2020 tax return, showing a refund, was filed by April 15, 2021, any refund that was due to the taxpayer would go to the accepted OIC tax liability.
The new policy change now generally allows the taxpayer to receive their refunds, related to tax periods included in the offer and after the offer acceptance date, rather than apply the refund to the OIC tax liability. This policy change went into effect for any OIC offer accepted on or after November 1, 2021. When the taxpayer, whose OIC offer was accepted on or after November 1, 2021, files their 2021 tax return that shows a refund by April 15, 2022, they will receive the refund.
Offset bypass refund (OBR)
If a taxpayer has applied for an OIC but it is still in the process of consideration, the taxpayer can request an OBR while waiting for an answer. The offset bypass is for when a refund, which would normally be applied to a prior tax liability, is instead distributed to the taxpayer. This can only be approved if the taxpayer can prove a hardship that the refund could avoid.
The IRS warns that timing is critical when requesting an OBR:
“The window of time to request an OBR is after the refund return is filed and before the IRS processes the return and offsets the refund. Once the refund has been offset, it’s too late to request an OBR”.