Can the IRS Take Your State Refund?

The Internal Revenue Service can take a state tax refund to satisfy a federal tax liability. This is executed through established federal programs that allow for the collection of delinquent debts. These programs provide a legal framework for the IRS and other government agencies to intercept payments, including state refunds, before they reach the individual.

The Treasury Offset Program

The primary mechanism used to seize a state refund is the Treasury Offset Program (TOP). This is a centralized debt collection system operated by the Bureau of the Fiscal Service (BFS), a part of the U.S. Department of the Treasury. The BFS acts as a clearinghouse for federal and state agencies to collect past-due debts. When the IRS determines a taxpayer has a delinquent tax liability, it can refer the debt to the BFS for collection through this program.

The scope of TOP extends beyond federal taxes. It is used to collect a wide range of government-owed debts, including past-due child support, defaulted federal student loans, and certain unemployment compensation debts. When a state prepares to issue a tax refund, the payment information is matched against the TOP database. If the recipient owes a delinquent debt, the BFS intercepts the state refund to pay the debt, and any remaining amount is sent to the taxpayer.

The State Income Tax Levy Program

A more direct tool the IRS can use is the State Income Tax Levy Program (SITLP). Unlike the broader Treasury Offset Program, which collects many types of debt, SITLP is a specific agreement between the IRS and state revenue agencies. This program is focused solely on the collection of delinquent federal income taxes.

Under SITLP, the IRS has the authority to issue a levy directly to a state’s revenue department. This levy legally requires the state to turn over a taxpayer’s state income tax refund to the IRS to cover their federal tax debt. This program represents a direct partnership between the IRS and state governments for seizing state-level payments.

The Notification Process

Before a state refund is intercepted through the Treasury Offset Program, the taxpayer should receive an advance warning. The IRS is required to send a “Notice of Intent to Offset” to the taxpayer. This notice is a prerequisite before the debt can be submitted to the BFS for collection and provides details about the situation.

The notice will specify the amount of the outstanding debt and identify the IRS as the creditor agency. It also informs the taxpayer of their rights, including the opportunity to dispute the debt’s validity or amount directly with the IRS within 60 days. If the taxpayer takes no action to pay or dispute the debt within this timeframe, the IRS proceeds with referring the debt to the TOP.

Handling Joint Filings and Incorrect Offsets

If a married couple files a joint tax return, the entire refund can be offset even if only one spouse owes the past-due debt. The spouse who does not owe the debt is known as the “Injured Spouse.” They can file Form 8379, Injured Spouse Allocation, to request their portion of the joint refund. This form is used to allocate the refund between spouses, not to dispute the debt.

To complete Form 8379, the injured spouse must provide detailed financial information to separate their income and tax payments from those of the debtor spouse. This includes allocating wages, self-employment income, and any tax credits or deductions. The IRS uses this information to calculate the injured spouse’s share of the refund, which is then issued separately. The form should be filed with the original joint tax return if possible, or by itself after the offset has occurred.