New IRS Rules Pause Refund Deadlines and Protect Tax Overpayments During Collection Disputes

The Taxpayer Due Process Enhancement Act is designed to level the playing field when you’re fighting the IRS over a tax bill. This legislation focuses on three key areas: making sure you don't lose your right to a refund just because you're busy fighting a collection action, preventing the IRS from snatching your overpayments during a dispute, and giving the Tax Court more power to review the whole situation.

Stopping the Refund Clock During a Fight

Imagine you’re disputing an IRS levy on your wages. Under current law, even while you’re tied up in the appeals process (called a Collection Due Process or CDP hearing), the clock is still ticking on the deadline to file a claim for any refund you might be owed for that same tax year. If you miss that deadline while waiting for the appeal to resolve, you lose the refund. Section 2 changes this by suspending the statute of limitations for filing a tax refund claim (Section 6511) for the duration of the collection dispute (Section 6330(e)(1)). This means if a small business owner is fighting a lien, they don't have to worry about missing the window to claim a legitimate overpayment they made related to that same tax period. The clock only restarts once the appeal process is officially over, ensuring you don't have to choose between fighting the collection action and protecting your refund rights.

Protecting Your Overpayments from Offset

This might be the most immediately helpful change for taxpayers in a dispute. Currently, if you have a tax overpayment—say, you paid too much in estimated taxes or had too much withheld—the IRS can automatically use that money to offset (pay down) any outstanding tax debt, even if you are actively disputing that debt. Section 3 puts a stop to this. If you properly request a hearing to dispute a tax liability, the IRS is prohibited from using any tax overpayment to pay that disputed debt during the appeal process (Section 6402). They can only do it if you explicitly consent. For the average worker, this prevents the IRS from automatically seizing a refund you might need to pay bills just to cover a debt that hasn't been legally settled yet. It keeps your money in your pocket until the dispute is resolved.

Expanding the Tax Court’s Power

When you appeal an IRS collection decision, you can take your case to Tax Court. Section 4 expands what the Tax Court can look at during that appeal. Previously, the court primarily reviewed whether the IRS followed proper procedures in its collection action. Now, the court gains jurisdiction to review not only the IRS’s collection determination, but also any underlying tax liability that was properly disputed during the initial IRS hearing. This is huge. It means the court can look at the original reason the tax was owed in the first place, rather than just whether the IRS sent the right letters. For a taxpayer, this provides a much more comprehensive review and a better chance to argue the merits of their case, especially if the original tax assessment was flawed. The Tax Court also retains jurisdiction even if the IRS decides to abandon the collection action after the petition is filed, ensuring the taxpayer gets their day in court.

The Trade-Off for the IRS

These changes are clearly a win for taxpayer protections, but they do complicate things for the IRS. The prohibition on offsetting overpayments (Section 3) means the IRS can't quickly apply funds to disputed debts, which will slow down the collection process. The agency will have to wait longer to settle accounts, and the administrative burden of tracking suspended refund clocks will increase. However, the intent here is clear: prioritize due process and fairness over administrative efficiency when a taxpayer is actively fighting a collection action.