What Can Take Your Federal Tax Refund?

Under certain circumstances, the government can reduce or completely seize an expected federal tax refund. This action is the result of specific, outstanding debts owed by a taxpayer and is handled through a systematic process governed by federal law.

The Treasury Offset Program

The federal government uses a centralized system called the Treasury Offset Program (TOP) to collect delinquent debts owed to federal and state agencies. It is administered by the Bureau of the Fiscal Service (BFS), a part of the U.S. Department of the Treasury.

When the Internal Revenue Service (IRS) identifies that a taxpayer is due a refund, the payment is checked against the TOP database. If the taxpayer’s Social Security number matches a debt, the BFS intercepts the refund and redirects the collected amount to the creditor agency to satisfy the obligation.

Debts That Can Be Collected From Your Refund

A specific set of legally enforceable debts can be collected through the Treasury Offset Program. The program is reserved for obligations owed to government entities, which are submitted by federal and state agencies after they have been unsuccessful in collecting the amounts directly.

Past-Due Federal Income Taxes

The most direct reason for a refund seizure is owing the IRS for a prior tax year. If a taxpayer has an outstanding federal tax liability, the IRS will automatically apply the current year’s refund to that old debt before any other debts are considered. Any remaining refund amount after the debt is paid will be sent to the taxpayer.

State Income Tax Obligations

Many states have agreements with the federal government allowing them to use the Treasury Offset Program. If a taxpayer owes delinquent income taxes to a state, that state’s revenue department can submit a claim to the TOP. The BFS can then intercept a federal tax refund to pay off the past-due state tax bill.

Past-Due Child and Spousal Support

One of the highest priorities for the TOP is the collection of past-due child and spousal support. State child support enforcement agencies report parents who are delinquent on their court-ordered support payments to the federal Office of Child Support Enforcement. This information is then entered into the TOP database for collection from federal payments.

Federal Agency Non-Tax Debts

Various federal agencies can use the TOP to collect non-tax debts. A common example is defaulted federal student loans, which the Department of Education can refer for offset. Other examples include overdue loans from the Small Business Administration (SBA) or unpaid housing loans administered by the Department of Housing and Urban Development (HUD).

State Unemployment Compensation Debts

States can use the TOP to recover unemployment compensation that was paid out improperly. This can occur if an individual received more benefits than they were entitled to, often due to fraud or a failure to report earnings. The state unemployment agency can submit the debt to the TOP to have it collected from a federal tax refund.

The Offset Notification Process

A taxpayer will be notified when their refund is seized. The agency to which the debt is owed must send a notice of intent to offset before submitting the debt to the TOP, providing a 60-day window to resolve the issue. Once the offset occurs, the Bureau of the Fiscal Service (BFS) mails an official notification letter. This notice states the original refund amount, the amount offset, and the creditor agency that received the payment, along with its contact information. An administrative fee, which was $21.38 in fiscal year 2024, is deducted from the refund before the funds are sent to the creditor agency.

Responding to a Tax Refund Offset

Upon receiving an offset notice from the BFS, a taxpayer has specific avenues for response. The appropriate action depends on whether the taxpayer disputes the debt or if the debt belongs to a spouse on a joint return. It is important to direct inquiries to the correct agency, as the IRS cannot assist with offsets for non-tax debts.

Disputing the Debt

If a taxpayer believes the offset was made in error or that the debt amount is incorrect, they must contact the creditor agency listed on the BFS notice. All communication regarding the validity of the debt must be handled directly with the agency that claimed the funds. The BFS notice provides the necessary contact information to begin this process.

Filing an Injured Spouse Claim

When a married couple files a joint tax return, the entire refund is subject to offset for the debts of either spouse. If one spouse’s past-due obligation causes the joint refund to be seized, the other spouse may qualify as an “injured spouse.” An injured spouse is someone who is not legally responsible for the debt but had their portion of the joint refund taken.

To reclaim their share, the injured spouse must file Form 8379, Injured Spouse Allocation. This form can be filed with the original joint tax return by writing “Injured Spouse” at the top of Form 1040, or it can be filed by itself after receiving the offset notice. Form 8379 requires the allocation of income, deductions, and tax payments between the spouses to calculate the portion of the refund attributable to the injured spouse. The IRS processes this form and will issue a refund for the injured spouse’s calculated share, which can take approximately eight weeks if filed separately.