Nicholas Frey

The Internal Revenue Service (IRS) has issued interim guidance on refund recoupments, clarifying its revised policy for employees of the Specialty Collection Offer in Compromise (SCOIC). The new guidance is projected to encourage more taxpayers to pursue a fresh start via the offer-in-compromise (OIC) route. This guidance is outlined in SBSE-05-1021-0063 (10/28/2021) and IRM 21.4.6.5.11.1 (11-08-2017).

The Offer in Compromise program is a tax settlement option that allows taxpayers to settle their tax liabilities for less than the full amount owed. It is available to taxpayers who are unable to pay their tax debts in full, either because of financial hardship or other reasons. However, one of the biggest obstacles that taxpayers face when pursuing an OIC is the recoupment of refunds.

Under the previous policy, the SCOIC employee reviewing an OIC application was required to initiate or recommend refund recoupment during the application process. This meant that any tax refunds the taxpayer was entitled to would be applied to their outstanding debt, making it difficult for taxpayers to pursue an OIC.

The new guidance issued by the IRS clarifies that SCOIC employees will no longer initiate or recommend refund recoupments during the OIC application process. This change allows taxpayers who are pursuing an OIC to keep any refunds they are entitled to, which can make a significant difference in their ability to pay off their tax debts.

An example of the new guidance in practice would be a taxpayer who owes the IRS $10,000 in back taxes and is entitled to a $2,000 tax refund. Under the previous policy, the SCOIC employee reviewing the taxpayer's OIC application would have recommended that the $2,000 refund be applied to the outstanding debt, leaving the taxpayer with only $8,000 remaining to settle.

However, under the new guidance, the SCOIC employee will not recommend refund recoupment during the application process. This means that the taxpayer will be able to keep their $2,000 refund and use it to pay for living expenses or other bills. If the OIC is ultimately accepted, the taxpayer will be able to settle their $10,000 tax debt for a reduced amount and move forward with a fresh start.

Another example would be a taxpayer who owes the IRS $50,000 in back taxes and is entitled to a $5,000 tax refund. Under the previous policy, the SCOIC employee reviewing the taxpayer's OIC application would have recommended that the $5,000 refund be applied to the outstanding debt, leaving the taxpayer with only $45,000 remaining to settle.

Under the new guidance, however, the taxpayer will be able to keep their $5,000 refund and use it to pay for living expenses or other bills. If the OIC is ultimately accepted, the taxpayer will be able to settle their $50,000 tax debt for a reduced amount and move forward with a fresh start.
In conclusion, the new interim guidance issued by the IRS is a positive development for taxpayers who are struggling to pay their tax debts. The revised policy for SCOIC employees clarifies that they will not initiate or recommend refund recoupments during the OIC application process, which makes it easier for taxpayers to pursue an OIC and get the fresh start they need to move forward financially. If you are considering an OIC, it is important to work with an experienced tax professional who can guide you through the process and ensure that you are taking advantage of all available options.