What Happens to Your Tax Refund During an Offer in Compromise or Payment Plan

People who resolve an IRS debt usually expect two things from the IRS afterward: leave me alone, and send me my refund. The first is mostly right. The second depends on which resolution you chose and when your refund was assessed.

The authority for keeping the refund is IRC 6402(a), which lets the IRS credit any overpayment against your outstanding federal tax. Offers in compromise and installment agreements each add their own terms on top of that. Those terms are part of the deal you sign, so they bind you as a matter of contract as well as statute.

Installment agreements: refunds go to the balance

The IRS payment plan page states it directly: your future refunds will be applied to your tax debt until it is paid in full. It also says to make all scheduled payments even if the IRS applies your refund to your account balance.

So a refund during a payment plan does two things. It reduces the balance, which reduces interest going forward. It does not reduce or skip your next installment. People get into trouble when they treat the refund as a prepayment and skip a month. A missed installment can default the agreement, and a defaulted agreement loses its protections, including the bar on levies in IRC 6331(k)(2)(C) while an agreement is in effect.

If the refund pays the balance in full, the agreement simply ends. If it leaves a small balance, consider paying it off rather than continuing the plan for a few more months of interest and penalties.

Your transcript will show the refund leaving the year it was generated and landing on a balance due year. The mechanics of that offset, and how to read the notice, are covered in the CP49 explainer.

Offers in compromise: the current Form 656 rule

The offer rule is more detailed and, in the current Form 656 booklet (Rev. 4-2026), it is tied to assessment dates. The booklet says the IRS may keep any tax refund, including interest, for a tax return assessed before the date the IRS accepts your offer, by offsetting it against your tax debt.

The booklet's example: you file your 2024 Form 1040 on April 15, 2025; the IRS assesses the tax on May 26, 2025 and offsets the overpayment; the IRS accepts your offer on July 1, 2025. Because the offset happened before acceptance, the overpayment reduces your outstanding liability.

The Form 656 terms add several related rules that matter in practice:

• The refund is not considered a payment toward your offer.
• Any refund from an amended return for a tax period ending before the offer is accepted will be offset to the tax liability.
• If you receive a refund before acceptance, or a refund based on an amended return for periods extending to the acceptance date, you agree to return it within 30 days.
• You agree not to file amended returns for the offer years while the offer is pending or after it is accepted, and filing one could be grounds for termination.
• The amount you offer may not include part or all of an expected or current tax refund.

One related term affects low-income filers. The Form 656 says that if you checked the Low-Income Certification, no payments are required until the offer is accepted, but if you choose to send payments anyway, the money is applied to the tax debt and will not be returned. Refunds and voluntary payments both end up on the balance, not back in your pocket.

The refund term is part of the contract you sign. Read the revision of Form 656 you actually submitted, because the terms of that version are the ones that apply to you. This page describes the April 2026 revision.

Why the IRS keeps refunds during an offer

An offer settles a debt for less than the full amount based on your reasonable collection potential. A refund that becomes available before acceptance is, from the IRS's point of view, money it could have collected anyway, so it is taken before the settlement is final. The Form 656 also states that systemic offset of overpayments will continue under IRC 6402(a) before the acceptance date.

That has a planning consequence. If you have a large refund coming, the timing of your return and of your offer can affect your total cost. A refund assessed before acceptance reduces the debt but does not reduce what you must pay under the offer, because the offer amount is a separate contractual payment. Think through the sequence before you file both.

Hardship while an offer is pending

The Form 656 booklet acknowledges the tension. It says that since your refund may be offset while the offer is pending, help from the Taxpayer Advocate or the IRS may be available for taxpayers, other than businesses, facing economic hardship.

The tool for that help is an offset bypass refund. IRM 21.4.6.5.7.1 notes that a freeze indicating a pending offer does not stop an OBR, and that for overpayments that become available before the acceptance date, where the offset has not yet happened, a taxpayer under certain hardship conditions may seek one. The timing is strict: you generally need to ask before the return is assessed. The procedure is explained in offset bypass refunds.

Levies, payments and the pending period

Refunds are not the only money issue during an offer. Under IRC 6331(k)(1), the IRS cannot levy while an offer is pending, for 30 days after a rejection, and while a timely appeal of the rejection is pending. The Form 656 terms add that the IRS may levy up to the time an IRS official signs and acknowledges the offer as pending and may keep levy proceeds collected before then. They also say the IRS will keep any payments you make with the offer and treat them as payments.

Installment agreements have a parallel protection. IRC 6331(k)(2) bars levy while an installment agreement request is pending, for 30 days after a rejection, while the agreement is in effect, and for 30 days after a termination, with extensions for timely appeals.

None of those levy protections stop a refund offset. IRC 6331(k)(3) borrows the exception in IRC 6331(i)(3)(B)(i), under which these levy restrictions do not apply to a levy to carry out an offset under section 6402. In practice, plan on the refund being offset during either resolution.

Treasury Offset Program debts still apply

Everything above concerns your federal tax debt. If you also owe child support, a federal agency debt, a state income tax obligation or an unemployment compensation debt, any refund left after the federal tax offset can be taken by the Treasury Offset Program. An offer or payment plan with the IRS does nothing to those debts. The second checkpoint is explained in how the Treasury Offset Program works.

Practical planning

If you are on a payment plan, stop thinking of your refund as income. Adjust withholding so you are not lending the government money that will be offset anyway, and keep paying your installments on schedule.

If you are preparing an offer, map out your filing dates and the expected offer timeline before filing anything. Do not include an expected refund in your offer amount. If a refund will be large and you face hardship, raise the offset bypass question before the return posts, not after.

And if you are deciding between an offer and a payment plan in the first place, the refund rules are one small piece of a bigger comparison. The firm's main site has an overview of the offer in compromise program that covers the larger factors. Refunds are the detail that people overlook, and overlooked details are where resolution plans get derailed.