Will the IRS Automatically Take My Refund If I Owe Them?
Will the IRS take your tax refund if you owe money? Understand how federal offsets work and what steps to take.
The Internal Revenue Service (IRS) can apply a taxpayer’s refund to various outstanding financial obligations. This ensures debts owed to federal or state government agencies are settled using available funds, including tax overpayments.
Understanding Refund Offsets
A refund offset occurs when the federal government applies all or part of your tax refund to pay a past-due debt. Your refund is used to satisfy a prior financial obligation. This process is managed through the Treasury Offset Program (TOP), administered by the Bureau of the Fiscal Service (BFS).
The Treasury Offset Program intercepts federal payments, such as tax refunds, to collect delinquent debts owed to federal and state agencies. If your full debt is not collected in one year, future offsets may occur until the debt is satisfied.
Types of Debts Leading to Offset
Several categories of debts can lead to a federal tax refund offset. Past-due federal tax debt, including unpaid income tax, penalties, and interest owed to the IRS, is the most direct cause. The IRS will reduce any refund to cover these outstanding tax liabilities first.
Beyond federal tax obligations, non-tax federal debts and state-referred debts can also trigger an offset. Common examples include past-due federal student loan debt, unpaid child support payments enforced by state agencies, and other federal agency debts like those related to Small Business Administration (SBA) loans or Veterans Affairs overpayments. The priority for offsets begins with federal tax debts, followed by child support, and then other federal agency debts.
The Refund Offset Process
When a refund offset occurs, taxpayers receive official notification. The Bureau of the Fiscal Service (BFS) sends a notice, such as IRS Notice CP49 or CP21B, detailing the offset. This notice includes the original refund amount, the amount offset, the agency that received the payment, and contact information for that agency. For federal tax offsets, the notice comes from the IRS; for other debts, it is from the BFS.
The offset happens before the refund is issued to the taxpayer. For many debts, the notice of the offset itself is often the first direct notification that the refund has been applied, though the taxpayer should have been aware of the underlying debt. The offset amount is sent directly to the agency to which the debt is owed, and any remaining balance of the refund is then issued to the taxpayer.
Options After a Refund Offset
If your refund has been offset, or if you believe an offset was made in error, specific steps can be taken. It is important to contact the agency that received the funds to address questions about the debt or the offset itself, rather than the IRS. The contact information for the responsible agency will be provided on the offset notice.
If you dispute the debt, you must contact the agency that received the funds to present your case, such as proving payment or disputing the amount. For married individuals who filed a joint tax return, if one spouse’s refund was offset due to a debt solely owed by the other spouse, the “injured spouse” may claim their portion of the refund. This can be done by filing Form 8379, Injured Spouse Allocation, which allows the un-indebted spouse to recover their rightful share of the refund. Form 8379 can be filed with the original tax return or separately after an offset notice is received.