CP98 Notice: Application of Refund to Outstanding Tax Debt

The CP98 Notice is issued by the IRS to inform taxpayers that their federal tax refund has been applied to a past due tax debt from a prior year. This action occurs when the IRS decides to use the taxpayer’s current-year refund to reduce or pay off outstanding tax liabilities from previous tax periods. The CP98 Notice provides taxpayers with the details of this application, including the amount applied and any remaining balance owed.

Key aspects of IRS CP98 Notice include:

1. Application of Refund to Prior-Year Debt
   The CP98 Notice specifies that the IRS has applied the taxpayer’s refund toward an outstanding tax balance, often without requiring the taxpayer’s consent. This action helps the IRS recover unpaid taxes and may partially or fully satisfy the taxpayer’s debt, depending on the amount of the refund and the outstanding balance.
2. Balance and Payment Summary
   The notice provides a breakdown of the tax debt, including the original balance, interest, and penalties accrued. If the applied refund amount does not fully cover the debt, the remaining balance will be noted, along with options for payment or setting up an installment agreement.
3. Future Refund Offsets
   If the taxpayer still has an outstanding balance after the refund is applied, the IRS may continue to offset future refunds until the debt is fully paid. Taxpayers are encouraged to review their account and contact the IRS if they want to establish a more formal repayment plan, rather than relying solely on refund offsets.
4. Options for Dispute
   If the taxpayer believes the IRS’s decision to apply their refund is incorrect, the CP98 Notice includes instructions for disputing the action. This could involve providing proof that the prior-year debt was already resolved, demonstrating an error in the debt calculation, or appealing the IRS’s decision to use the refund for offset.
5. Implications for Tax Debt Resolution
   The CP98 Notice highlights the IRS’s ability to enforce collection actions directly through refund offsets. While this approach can gradually reduce a taxpayer’s debt, it may not be the most efficient way to resolve tax liabilities. Taxpayers seeking faster resolution often contact the IRS to establish an installment agreement, apply for currently not collectible status, or pursue an offer in compromise if eligible.

By addressing a CP98 Notice proactively, taxpayers can better manage their tax debt and explore alternative repayment options that provide more control over their finances.