If You Owe Taxes, Will They Take Your Refund?
Discover if your tax refund can be reduced or withheld due to outstanding debts. Learn how this process works and what actions you can take.
If you are anticipating a tax refund, it is possible for some or all of that refund to be withheld to cover certain outstanding debts. This process, known as a tax refund offset, ensures that money you are owed by the federal government can be used to satisfy other financial obligations. Understanding when and how these offsets occur can help you manage your finances more effectively.
Debts That Can Reduce Your Refund
Several categories of debts can lead to your federal tax refund being reduced or completely withheld. These typically involve money owed to federal or state government entities.
One common reason for an offset is past-due federal tax debt, such as unpaid income tax from previous years. The Internal Revenue Service (IRS) can apply your current refund directly to these outstanding tax liabilities.
State tax debts can also trigger a federal refund offset. If you owe income taxes to a state government, that state can request the U.S. Department of the Treasury to intercept your federal refund to cover the amount due.
Child support obligations are another category that can result in a refund offset. If you have past-due child support payments, federal law authorizes the interception of your federal tax refund to satisfy these debts.
Beyond tax and child support, various other federal non-tax debts can lead to an offset. These include defaulted federal student loans, where your refund can be used to repay the outstanding balance. Similarly, unemployment compensation overpayments, often due to fraud or failure to report earnings correctly, can also result in your refund being withheld. Debts owed to other federal agencies, such as those related to Small Business Administration (SBA) loans or Department of Housing and Urban Development (HUD) loans, may also be subject to offset.
How Refund Offsets Occur
The process of a tax refund offset is managed through the Treasury Offset Program (TOP), which is administered by the Bureau of the Fiscal Service (BFS) within the U.S. Department of the Treasury. This centralized system allows federal agencies and states to collect delinquent debts by intercepting federal payments, including tax refunds.
When the IRS processes your tax return and determines you are due a refund, that information is sent to the BFS. The BFS then checks its database for any outstanding debts you may owe to federal or state agencies participating in the TOP. If a match is found and your debt meets the criteria for offset, the BFS diverts the necessary funds from your refund to the creditor agency. Any remaining balance of your refund is then sent to you as originally requested.
Taxpayers are notified if their refund has been offset. The BFS sends a letter detailing the original refund amount, the amount offset, the agency that received the payment, and contact information for that agency. While some agencies may send a “Notice of Intent to Offset” prior to the actual interception, the notification from BFS arrives after the offset has occurred.
Protecting Your Share of a Joint Refund
When a joint tax refund is offset due to a debt owed by only one spouse, the other spouse may be considered an “injured spouse.” This situation is distinct from “innocent spouse” relief, which applies to tax liabilities arising from errors made by a spouse on a joint return. An injured spouse is someone who filed a joint return and whose portion of the refund was, or is expected to be, applied to their spouse’s past-due obligation for which they are not legally responsible.
To claim your share of a joint refund that was offset, the injured spouse can file Form 8379, Injured Spouse Allocation. This form helps the IRS determine the non-debtor spouse’s rightful portion of the refund. You can file Form 8379 with your original joint tax return if you anticipate an offset, or separately after you have been notified of the offset.
The form requires specific information to allocate income, deductions, credits, and payments accurately between both spouses. This allows the IRS to calculate what portion of the refund is attributable to the injured spouse and should be released to them.
Questioning a Refund Offset
If you believe your tax refund was offset in error or if you dispute the underlying debt, the primary course of action is to contact the agency to whom the debt is owed directly, rather than the IRS. The IRS’s role is to facilitate the offset through the Treasury Offset Program, but it does not have information about the specifics of the debt itself.
For federal tax debts, you would contact the IRS directly to discuss the disputed amount. If the offset was for a state tax debt, child support, or a federal non-tax debt like a defaulted student loan, you should reach out to the relevant state agency or the specific federal agency that reported the debt. The notification letter you receive from the BFS will include contact information for the agency that received the offset payment, which is the entity you need to engage with. When contacting the agency, be prepared to provide documentation related to the debt or your tax refund, such as copies of notices received, payment records, or other supporting evidence.