If You Owe Taxes, Will the IRS Take Your Refund?
Discover how your federal tax refund could be applied to outstanding obligations and what actions you can take to understand and manage the situation.
Receiving a tax refund can be a welcome financial boost. This refund represents an overpayment of taxes throughout the year, typically through payroll withholdings or estimated tax payments. While taxpayers anticipate receiving their full refund, outstanding government debts can lead to the withholding, or “offset,” of this amount. The federal government collects delinquent obligations by intercepting a portion or all of a taxpayer’s refund.
Understanding Refund Offsets
A refund offset occurs when the federal government uses all or part of an individual’s tax refund to pay off an overdue debt. This mechanism is managed through the Treasury Offset Program (TOP), administered by the Bureau of the Fiscal Service (BFS) within the U.S. Department of the Treasury. TOP is a centralized system for collecting delinquent debts owed to federal agencies and states. The program’s authority comes from 31 U.S.C. 3720A, which permits the offset of federal payments, including tax refunds, to collect delinquent debts.
When the Internal Revenue Service (IRS) calculates a tax refund, it first checks with the BFS for eligible debts. If a debt exists, the IRS transfers the refund to the BFS. The BFS then disburses the funds to the specific federal or state agency to which the debt is owed. The taxpayer receives a notice from the BFS explaining the offset, including the original refund amount, the offset amount, the agency receiving the payment, and contact information for that agency.
Types of Debts That Trigger Offsets
Several categories of debts can lead to a federal tax refund offset. Federal tax debts from prior years are a common reason for offsets. This includes unpaid income tax, self-employment tax, penalties, and interest on previous tax liabilities. The IRS directly manages these debts, and they are automatically considered for offset against current year refunds if not paid.
State income tax debts can also trigger an offset if the state certifies the delinquency to the Treasury. If you owe overdue state taxes, your federal refund could be used to satisfy that obligation.
Federal non-tax debts include obligations owed to various federal agencies. These can include delinquent student loans from the Department of Education, defaulted federal housing loans from agencies like the Department of Housing and Urban Development, or overpayments of federal benefits such as Social Security or Veterans Affairs (VA) benefits. Each federal agency certifies its delinquent debts to the BFS for collection through the offset program.
Unpaid child support and spousal support obligations are also subject to federal tax refund offsets. State child support enforcement agencies certify these delinquent support payments to the Treasury.
Checking Your Refund Status
Taxpayers can determine if their refund has been or will be reduced due to an offset. The IRS “Where’s My Refund?” tool is a primary resource. Available on the IRS website, this online tool allows taxpayers to check the status of their federal income tax refund. To use it, individuals need their Social Security number or Individual Taxpayer Identification Number, their filing status, and the exact refund amount shown on their filed tax return.
If an offset has occurred or is pending, the “Where’s My Refund?” tool may display a message indicating the refund amount has been adjusted. It might also direct the taxpayer to contact the Bureau of the Fiscal Service (BFS) for more information. For specific details about an offset, including the agency that received the funds and their contact information, taxpayers can call the BFS Offset Hotline at 1-800-304-3107. The hotline provides automated information about offsets that have occurred within approximately the last two weeks.
Navigating Outstanding Debts
If you anticipate owing federal tax debts, or have an existing one, several options are available to manage the situation and potentially avoid a refund offset. The IRS offers payment plans, known as Installment Agreements, which allow taxpayers to make monthly payments for up to 72 months to pay off their tax liability. An Offer in Compromise (OIC) is another option where the IRS may agree to accept a lower amount than what is owed if the taxpayer can demonstrate an inability to pay the full amount. In cases of financial hardship, taxpayers can also request a temporary delay in collection, though this does not eliminate the debt or stop interest and penalties from accruing.
For non-tax debts, such as delinquent student loans or overpaid federal benefits, direct communication with the specific federal or state agency to which the debt is owed is the appropriate step. For instance, contacting the Department of Education or its assigned loan servicer can lead to discussions about repayment plans, loan rehabilitation, or consolidation options for a defaulted federal student loan. Similarly, reaching out to the state child support enforcement agency can help arrange a payment schedule or address any disputes regarding child support arrears.
If a taxpayer believes the offset was made in error or wishes to dispute the debt, they must contact the agency that received the funds, not the IRS. The IRS’s role is typically limited to transferring the refund amount to the BFS based on the certified debt information.