Understanding Why Your Tax Refund Wasn't Sent After an Offer in Compromise

Latest Facts and News

• The IRS processed over 145 million individual tax returns in 2023, issuing nearly $326 billion in refunds.
• Recent changes to the Offer in Compromise program have made it more accessible to taxpayers.
• The IRS has increased its focus on taxpayer education regarding offer in compromise and refund policies.
• New digital tools are being developed to streamline the offer-in-compromise process and improve communication with taxpayers.

If your tax refund never arrived after an Offer in Compromise, don’t panic. Many taxpayers are unaware that the IRS automatically applies refunds to unpaid debts as part of the agreement.

So if you are confused about why the offer in compromise tax refund was sent, it’s likely due to IRS policy—not an error. 

But what can you do next? Before assuming there’s an issue, understand why your refund wasn’t sent, what the offer in compromise agreement says, and whether there’s any action you need to take. This blog will help you review your agreement, check your IRS records, and ensure no surprises are moving forward.

What is an Offer in Compromise?

Offer in Compromise (OIC) is an agreement between the IRS and the payer, which allows the taxpayer to settle the tax debt for a lesser amount than the outstanding balance. This is a facility for the individuals who cannot afford to pay the full tax debt due to poor financial condition.

Eligibility Criteria for offer in compromise 

IRS uses specific eligibility criteria to approve an offer in compromise:

• Tax returns: The Taxpayer must have filed all required tax returns.
• Not in bankruptcy: The taxpayer must not be in an active bankruptcy case.
• Received a tax bill: The taxpayer must have received a bill for at least one tax debt included in the offer.
• Current on payments: The taxpayer must have made all required estimated tax payments for the current year and, if applicable, all required federal tax deposits for the current quarter and the two preceding quarters.

The Relationship Between Offer In Compromise and Tax Refunds

Many taxpayers feel surprised when an offer in compromise for a tax refund is not sent​.

Here is what you need to know about the refund rules and regulations:

IRS Policies on Refunds During the offer in compromise Process

If you accept an Offer in Compromise, the IRS will keep any tax refund, including interest, for the year the offer is approved. This retained refund is treated as an additional payment toward your settlement. However, future refunds are not automatically withheld as long as you comply with tax filing and payment obligations.

Refund Offset Explained

A refund offset happens when the IRS redirects a taxpayer’s refund to cover outstanding debts. 

Types of debts that Trigger Refund Offset

• Federal Income taxes
• Past due child support
• Defaulted student loan
• Unpaid state income taxes
• Unemployment compensation debts

The IRS applies the taxpayer’s refund to the remaining tax debt before finalizing the settlement agreement.

For example, if a taxpayer owes $20,000 in taxes and their offer in compromise is approved for $10,000, any refund due for that tax year will be used to reduce the debt. If the IRS withholds a $2,000 refund, the taxpayer must only pay the remaining $8,000 to settle their liability.

Understanding refund offset policies can help taxpayers avoid surprises and plan their finances accordingly. The IRS regularly updates its offer in compromise acceptance rates and refund offset statistics, making it essential to stay informed about current tax debt resolution options.

Why Your Tax Refund May Not Be Sent After an offer in compromise?

Understanding the key terms in the agreement can help you understand when your expected offer in compromise tax refund is not sent. 

Here’s what you can do for a clearer picture:

Terms of the Offer in Compromise Agreement

The IRS may withhold your refund to cover outstanding tax debts when accepting an Offer in Compromise.

• First-Year Refund Retention: Any refund for the tax year in which the offer in compromise was accepted is automatically applied to the debt, even if the agreed-upon settlement amount has been paid in full.
• Future Refunds: Refunds from subsequent tax years are not withheld unless the taxpayer fails to comply with tax obligations.
• No Negotiation: Taxpayers cannot request or negotiate to keep their refund for the year of offer in compromise acceptance—it’s a standard condition of the agreement.

Ongoing Tax Compliance Requirements

To keep the benefits of an Offer in Compromise, you must stay compliant with IRS tax rules and filing deadlines. If you fail to comply, the IRS may revoke your agreement and retain future refunds.

Let’s look at it in detail:

• Filing Late or Not Filing at All: The IRS requires taxpayers with an offer in compromise to file all tax returns on time for at least five years.
• Owing New Tax Debt: If you incur new unpaid tax debt, the IRS can apply your refunds toward it.
• Incorrect or Incomplete Tax Filings: Errors in Income reporting, deductions, or credits can delay or prevent refunds.
• Failure to Make Estimated Tax Payments: If you’re self-employed or have other non-W-2 income, failing to pay estimated taxes quarterly can affect your refund eligibility.

Steps To Verify Why the Offer In Compromise Tax Refund Was Not Sent 

To clarify why the offer in compromise tax refund was not sent, you can check the following details on your agreement:

Step 1: Review Your Offer In Compromise Agreement

• Check the terms: The IRS keeps your refund for the year your offer was approved. This is non-negotiable.
• Confirm the offer in compromise approval year: If approved in 2023, the IRS will take your 2023 refund (filed in 2024). Future refunds should be issued normally.
• Look for compliance issues: If you have new tax debt, late filings, or missed payments, the IRS may withhold future refunds as well.

Step 2: Verify Where Your Refund Was Applied

• Offer in compromise application: If the IRS took your refund, it most likely went toward reducing your remaining tax debt.
• Other federal offsets: In some cases, refunds are applied to other obligations such as child support, student loans, or federal debts.

Also Read: Understanding IRS Refund Number 9001: Causes and Solutions

Step 3: Contacting the IRS

After reviewing your offer in compromise agreement, if you still believe your refund was withheld in error, contacting the IRS can help clarify your situation.

Best Ways to Contact the IRS 

Step 4. Book a Tax Resolution Specialist 

The processes regarding taxes and refunds can be confusing for a layman. Contacting an expert tax resolution specialist can save you time and effort. 

Hall’s IRS helps its clients retain their money without legal complications if a refund is wrongly withheld due to an error. 

Preventing Future Issues with Tax Refunds and Offers in Compromise

To avoid future refund surprises related to offer in compromise tax refunds not sent, it is important to proactively follow all the tax compliance and understand the IRS policies. Here is what you can do to prevent future issues;

Proper Tax Planning

Strategic tax planning can help avoid situations where your refund is withheld or applied to debts.

• File on Time, Every Time: Late filings can lead to penalties and impact your IRS standing.
• Avoid New Tax Debt: Any unpaid taxes after an offer in compromise could trigger refund offsets.
• Adjust Your Withholding: If you typically receive large refunds, consider adjusting your W-4 to keep more money upfront instead of relying on refunds.
• Make Estimated Payments: If self-employed, ensure quarterly estimated tax payments are made to avoid future tax liabilities.
• Seek Professional Guidance: A tax professional can help ensure compliance and minimise refund risks.

Alternatives to Consider

Not everyone can avail of offer in compromise; you can benefit from other IRS debt settlement programs. These programs provide relief and offer different refund opportunities.  

Installment Agreements

The installment agreement (IA) allows the taxpayer to pay the debt over time instead of settling for a lower amount.  Unlike an offer in compromise, refunds are typically not retained under an IA, but important considerations remain.

Key Differences between an offer in compromise and an IA

Currently Not Collectible Status

If you can’t afford payments and your income barely covers basic expenses, the IRS may classify your debt as Currently Not Collectible (CNC). This means they pause collections, but it has different refund implications.

How the CNC Status Affects Refunds:

• While under CNC, any tax refunds will still be applied to unpaid tax debt.
• Unlike an Offer in Compromise, CNC doesn’t forgive any portion of your tax debt, it only delays collection.
• The IRS will review your financial status periodically and may resume collections if your situation improves.

Hire A Tax Resolution Expert Today

Offer in Compromise is for your convenience during struggling financial years. However, the complications related to why an offer in compromise tax refund is not sent can be easily handled under an expert’s guidance. 

At Hall’s IRS, we provide complete information regarding the procedures of getting an offer in compromise agreement and the tax compliance afterwards. 

Book a Consultation Call Today