26 USC 6402: IRS Authority to Offset Your Tax Refund

When you file your federal income tax return and have paid more in taxes than you owe, the difference is considered an overpayment. While this amount is typically returned as a tax refund, federal law provides the Internal Revenue Service (IRS) with the authority to handle these overpayments differently. This authority allows the government to collect certain outstanding debts by reducing or intercepting your expected refund. The process is systematic and involves coordination between the IRS and other government entities.

IRS Authority to Offset Overpayments

The legal foundation for the IRS’s ability to redirect a refund is found in 26 USC 6402. This statute grants the Secretary of the Treasury two primary powers over a taxpayer’s overpayment. The first is the authority to credit the overpayment against any outstanding federal tax liability the same taxpayer owes from a previous year.

Beyond settling federal tax debts, the law expands this authority to cover non-tax debts owed to other government agencies. This is accomplished through the Treasury Offset Program (TOP), a centralized debt collection system managed by the Bureau of the Fiscal Service (BFS). The IRS is required to reduce a refund for specific types of debt reported to the BFS by other federal and state agencies.

Debts Subject to Offset

A range of legally enforceable debts can trigger a refund offset through the Treasury Offset Program. One of the most common is past-due child support, which state child support enforcement agencies can certify to the federal government for collection. Another significant category includes debts owed to other federal agencies, such as defaulted federal student loans or Small Business Administration loans.

The authority also extends to certain state-level debts, allowing states to request the offset of federal tax refunds to satisfy past-due state income tax obligations and to recover state unemployment compensation debts. For a debt to be eligible for TOP, it must be delinquent for a specified period, and the debtor must have been given prior notification and an opportunity to resolve it.

The Offset Process and Notification

The refund offset process begins when you file a tax return that shows an overpayment. The IRS first checks its own records for any outstanding federal tax liabilities and will apply the refund to that balance first. Any remaining overpayment is then checked against the Treasury Offset Program database for other eligible debts.

If your name and taxpayer identification number match a debt submitted to TOP, the Bureau of the Fiscal Service will reduce your refund by the amount you owe. Following this action, the BFS is required to send you an official written notice. This notice details the original refund amount, the amount offset, any portion of the refund you will still receive, and identifies the specific creditor agency to which the funds were sent, providing their contact information. An administrative fee is typically deducted from the refund to cover the cost of the offset.

Recourse for Incorrect Offsets

If a refund offset occurs, the IRS itself cannot resolve a dispute about the validity or amount of a non-tax debt; that must be handled directly with the creditor agency. The offset notice from the Bureau of the Fiscal Service will provide the name and contact information for the agency that holds the debt. You must contact them to dispute the obligation or arrange a payment plan.

A different form of recourse is available for spouses who file a joint tax return when the offset is for a debt owed solely by one spouse. In this scenario, the other spouse may file Form 8379, Injured Spouse Allocation, to reclaim their portion of the joint refund. To complete this form, the injured spouse must allocate all income, tax withholding, and credits between themselves and the debtor spouse. Form 8379 can be filed with the joint tax return, by itself after the return is filed, or with an amended return.