At VITA sites there can often be pressure to file a tax return quickly. Volunteers naturally want to help as many people as possible. Plus, many clients urgently need their refund for necessities like rent, children’s clothing, or catching up on past-due bills. So it’s understandable that both the client and the tax preparer often feel a strong urge to go ahead and file a return. But this is not always the right thing to do.  

This two-part post highlights situations where waiting to file a return can protect important rights that the client has, and can lead to greater financial stability for the client in the longer term.  

Scenario: “I won’t get my refund anyway.”  

Sometimes clients don’t seem excited about their tax refund. It’s important to follow up when that happens because there might be a way to help them. You want to determine two things: 

1. Does the client owe IRS debt?  
2. Does the client have a financial hardship?  

We’ll go into both parts of this below in more detail. If the answer is yes to both, and the VITA-prepared tax return shows a refund --- ? stop ?! The client’s refund will be taken by the IRS if the return is filed as usual. But, the client may be able to get their refund if they (and the VITA site) coordinate with TAS or an LITC before filing the tax return.  

This is an option for eligible taxpayers. Some clients are happy to pay off their IRS debt using their tax refund, and obviously, the IRS is pleased when people make that choice.  

What is Hardship? 

Treasury Regulations explain that hardship is when a taxpayer is “unable to pay his or her reasonable basic living expenses.” The IRS manual says, “there is no exclusive list of expenses which would qualify a taxpayer” for hardship. The hardship may be a pending cut-off of electricity, eviction, foreclosure, repossession of a car, need for heating oil, or other basic life needs. 

What are Refund Offsets? 

When someone owes money to the IRS, their tax refunds will normally be applied to the IRS debt. The IRS calls this a refund offset. Once a refund is offset, it cannot be recovered except in rare cases where the IRS made an error.  

For 2020 and 2021 tax returns IRS made an exception for Recovery Rebate Credits, but for 2022 returns, the IRS has resumed refund offsets. 

What is Offset Bypass and How Does it Work? 

Luckily, there is an exception called Offset Bypass Refund (OBR). In an OBR, a person at the IRS bypasses the computer-programmed offset and directs that the refund be paid out to the taxpayer. For legal background and more details including links to the internal IRS procedures, see this Procedurally Taxing blog post. 

Here are a few important things to know about OBRs.  

OBR is only for IRS debts.  

If the client owes other debts reported to the Treasury Offset Program (like child support), they must address the debt with the originating agency. Not all creditors can seize tax refunds. Clients who are not sure if they have other debt attaching to their tax refunds can call the Bureau of the Fiscal Service at 800-304-3107 (TTY/TDD 866-297-0517).  

If the client does not know if they owe IRS debt, they can call the IRS at 800-829-1040. An IRS online account will also show this. Check with your site coordinator if the client asks for help setting up an online account. If there is room in the schedule, some sites will help with this. 

OBR requires financial hardship. 

The IRS will ask for proof of the client’s hardship, such as an eviction notice, a utility shutoff notice, or other documents. They will also ask for a copy of the unfiled tax return showing the expected refund.  

If documents don’t exist or can’t be obtained quickly, the IRS Local Taxpayer Advocate can write a letter documenting verbal testimony that supports the hardship. An LITC should have a working relationship with their local taxpayer advocate and should be able to help clients through this process. The client can also go directly to TAS.  

The IRS will only release the amount of the refund needed to prevent the hardship. For example: the client’s 2022 tax return shows a $1,000 refund and the client has a utility shutoff notice showing they owe $300. The IRS will release $300 of the refund, but they will apply the rest ($700) to the client’s debt.  

The timing is critical; coordinate to file the tax return at the right time.  

An offset bypass must be requested before the offset has occurred. For e-filed returns, offsets can occur shortly after filing. A tax return should not be e-filed until everything is set for the OBR request: all documents and financial information need to be put together, and TAS should be on board with a supporting letter if that is necessary. The person filing the tax return must coordinate with the LITC or TAS advocate working on the bypass request and get the green light from them before e-filing. 

The OBR bottom line 

We know that a tax refund can make the critical difference in helping a client avoid eviction, repossession of a car, or other destabilizing events, and the avalanche of financial problems that often follow. Spotting this issue, connecting the client with TAS or an LITC, and holding off on filing that tax return could save a family from a long period of hardship.