Will I Get a Refund if I Owe Back Taxes?

A tax refund represents an overpayment of taxes, typically through payroll withholdings or estimated tax payments. This money is then returned to the taxpayer by the government. However, when a taxpayer owes back taxes or other specific debts, the refund amount can be reduced or entirely withheld. Understanding how these situations interact is important for individuals expecting a refund while also having outstanding obligations.

How Tax Refunds Are Applied to Debts

The U.S. Department of the Treasury operates a program known as the Treasury Offset Program (TOP) designed to collect delinquent debts owed to federal and state agencies. When a taxpayer is due a refund from the Internal Revenue Service (IRS), the IRS first sends the refund amount to the Bureau of the Fiscal Service (BFS), which administers the TOP. The BFS then checks if the taxpayer owes money to any government agency. If a debt is identified, the BFS will automatically reduce or “offset” the taxpayer’s refund to satisfy the outstanding obligation. This process is generally automatic.

The refund amount is applied in a specific order of priority to different types of debts. Federal tax debts are typically addressed first through this offset mechanism. After federal tax obligations are satisfied, any remaining refund can then be applied to other federal non-tax debts. Finally, if a balance still remains, it may be used to cover certain state-level debts.

Types of Debts That Can Reduce Your Refund

Several categories of past-due obligations can lead to a tax refund offset through the Treasury Offset Program. One common type is past-due federal tax obligations, such as unpaid income taxes from previous years or penalties assessed by the IRS.

Another significant category includes past-due child support payments that have been reported to the Treasury by state child support enforcement agencies. Additionally, defaults on federal student loans can trigger a refund offset.

Other federal non-tax debts also fall under the scope of the Treasury Offset Program. This can include unpaid fines, overpayments of federal benefits, or other debts owed to federal agencies. Lastly, past-due state income tax obligations can lead to an offset, provided the state participates in the program and reports the debt to the Treasury.

Checking Your Refund Status After an Offset

Taxpayers can determine the status of their refund and whether it has been offset by using the IRS “Where’s My Refund?” tool. This online tool provides information on the refund’s processing stage, including if it has been sent to the Treasury Offset Program. It will indicate if the full refund amount has been offset or if a portion was retained.

If a refund is reduced due to an offset, the Bureau of the Fiscal Service (BFS) sends a Notice of Offset to the taxpayer. This notice provides specific details about the offset, including the original refund amount, the amount that was offset, and the agency that received the funds. The notice also includes contact information for the agency to which the debt was owed.

The IRS can only provide information about the original refund amount and confirm if an offset occurred. For questions regarding the nature or validity of the debt itself, taxpayers must contact the agency listed on the Notice of Offset.

Next Steps If You Still Have an Outstanding Balance

If your tax refund was offset but you still have an outstanding tax balance, or other debts remain, taking proactive steps is important. The first action involves contacting the relevant agency to understand the remaining balance and discuss resolution options. For federal tax debts, this means reaching out to the Internal Revenue Service directly to clarify the exact amount still owed.

Many taxpayers with outstanding federal tax balances can explore payment arrangements with the IRS. One common option is an Installment Agreement, which allows taxpayers to make monthly payments over a period, often up to 72 months, to pay off their tax debt. The IRS may charge interest and penalties on the unpaid balance, even with an agreement in place.

Alternatively, some taxpayers may qualify for an Offer in Compromise (OIC), which allows them to resolve their tax liability with the IRS for a lower amount than what they originally owe. An OIC is generally considered when taxpayers are experiencing significant financial difficulty. The IRS considers factors such as the taxpayer’s ability to pay, income, expenses, and asset equity when evaluating an OIC application.