If You Owe Money to the IRS Will They Take Your Refund?

Receiving a tax refund can be a welcome financial event, providing funds for various needs or savings. However, if there are outstanding debts, the Internal Revenue Service (IRS) and other government agencies can intercept some or all of a taxpayer’s refund to satisfy those obligations. This process, known as a tax refund offset, is a routine mechanism for collecting delinquent federal and certain non-federal debts.

Understanding Tax Refund Offsets

The mechanism for intercepting tax refunds to pay delinquent debts operates primarily through the Treasury Offset Program (TOP). This program is managed by the Bureau of the Fiscal Service (BFS), a division of the U.S. Department of the Treasury. The BFS is responsible for issuing federal payments, including tax refunds.

When a taxpayer is due a federal tax refund, the IRS first processes the tax return. Instead of directly sending the refund to the taxpayer, the IRS transmits the refund amount to the BFS. The BFS then checks its database for outstanding delinquent debts owed to federal or state agencies. If a match is found, the BFS withholds all or a portion of the refund to cover the debt. Any remaining balance of the refund, after the offset, is then sent to the taxpayer.

Debts That Trigger Offsets

Several types of debts can trigger a tax refund offset through the Treasury Offset Program. These include obligations owed to federal agencies and, in some cases, to state governments.

Federal tax debts are a primary reason for offsets. This includes any past-due federal income taxes, as well as associated penalties and interest from previous tax years. If a taxpayer owes money directly to the IRS, the agency can apply any refund to that outstanding balance.

Past-due child support is another common debt that leads to tax refund offsets. State child support enforcement agencies can report these delinquent obligations to the Treasury Offset Program. The federal government can then intercept tax refunds to satisfy these court-ordered support payments.

Certain state income tax debts can also result in a federal refund offset. Some states have agreements with the federal government that allow them to request the interception of federal tax refunds for overdue state income taxes.

Beyond tax-related obligations, various other federal agency non-tax debts can trigger offsets. Common examples include defaulted federal student loans, overpayments of unemployment compensation, and other debts owed to federal agencies such as the Small Business Administration or the Department of Housing and Urban Development.

Notification and Joint Refunds

When a tax refund is offset, taxpayers typically receive official notification from the government. The Bureau of the Fiscal Service (BFS) usually sends a Notice of Offset, detailing the original refund amount, the amount withheld, the specific agency that received the funds, and contact information for that agency. The BFS notice provides specifics about the debt that caused the offset.

A common scenario involves joint tax returns where a refund is offset due to a debt owed by only one spouse. In such cases, the spouse who does not owe the debt is considered an “injured spouse.” This individual may be able to reclaim their portion of the refund.

To do so, the injured spouse can file Form 8379, “Injured Spouse Allocation.” This form allows the non-debtor spouse to separate their share of the joint refund, based on their income, deductions, and credits reported on the joint return. Filing Form 8379 can be done either with the original joint tax return or separately after an offset has occurred.

What to Do After an Offset

If a tax refund has been offset, or if a taxpayer anticipates an offset, there are specific steps to consider. The primary action depends on whether the underlying debt is disputed. If there is a disagreement about the validity or amount of the debt that caused the offset, the dispute must be directed to the agency that reported the debt. This could be a child support agency, a student loan servicer, or a state tax authority, not the IRS. The IRS’s role is to process the refund and forward it to the BFS for offset; it does not manage the specifics of the underlying debts.

Taxpayers can contact the Treasury Offset Program (TOP) Call Center at 800-304-3107 for information on why their refund was offset and which agency received the funds. After an offset, it is important to determine if any balance of the debt remains. If a federal tax debt still exists, the IRS offers several payment options. These include setting up an Installment Agreement, which allows taxpayers to make monthly payments over time.

Another option for significant federal tax debt is an Offer in Compromise (OIC), which allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than what is owed. Eligibility for an OIC depends on the taxpayer’s ability to pay, income, expenses, and asset equity. For those experiencing financial hardship, the IRS may also grant “Currently Not Collectible” (CNC) status, temporarily halting collection efforts if paying the debt would prevent the taxpayer from meeting basic living expenses. While in CNC status, interest and penalties continue to accrue, and any future tax refunds may still be offset.