Will the IRS Take My Child Tax Credit for Back Taxes?

Taxpayers with outstanding debts often wonder if their tax refund, specifically the portion from the Child Tax Credit, can be taken by the Internal Revenue Service. The rules governing the IRS’s ability to offset refunds have changed following the expiration of temporary pandemic-era legislation. This article clarifies when the IRS can apply the Child Tax Credit towards back taxes and other outstanding liabilities.

Understanding the Child Tax Credit and Refundability

The Child Tax Credit is a tax benefit for families with a twofold structure. A portion of the credit is “non-refundable,” meaning it can reduce a taxpayer’s liability to zero but will not be paid out as a refund beyond that point. For the 2024 and 2025 tax years, the total credit is valued at up to $2,000 per qualifying child and directly lowers the amount of tax you owe.

The second component is the “refundable” portion, officially known as the Additional Child Tax Credit (ACTC). This part of the credit is what can generate a tax refund, even if the taxpayer has no tax liability. For 2024 and 2025, the refundable ACTC is worth up to $1,700 per child, but to claim it, a taxpayer must have earned income of at least $2,500.

The ACTC is treated as a payment, similar to federal income tax withholdings from a paycheck. This amount is calculated on Form 8812 and is added to your total refund, making it available to be offset for certain debts.

IRS Seizure of Tax Refunds for Federal Tax Debt

When you file your tax return, the refundable ACTC is not treated as a separate, protected payment. It is combined with your other refundable credits and any excess income tax withheld to form your total potential tax refund. The IRS has the legal authority to take this entire refund amount and apply it to any outstanding federal tax debt you owe from prior years.

This process is known as a refund offset, an automated system that checks for pre-existing debt with the IRS. If a match is found, the IRS will automatically reduce the refund by the amount of tax owed. The taxpayer will receive a Notice of Offset from the IRS explaining where the money went and the amount applied to the back taxes.

Any special protections that existed under temporary legislation, such as the American Rescue Plan Act of 2021, have expired. That law’s provisions for a fully refundable credit and advance payments were for the 2021 tax year only. Under current law, the refundable portion of your Child Tax Credit is subject to seizure for delinquent federal taxes.

Seizure for Other Debts via the Treasury Offset Program

Beyond collecting its own tax debts, the IRS participates in the Treasury Offset Program (TOP). This program is administered by the Bureau of the Fiscal Service and intercepts federal payments, including tax refunds, to cover delinquent non-tax debts owed to other federal and state agencies. Your refund can be seized through TOP even if you are current with the IRS.

The types of debt subject to collection through TOP include past-due child support, federal agency non-tax debts like defaulted federal student loans or Small Business Administration (SBA) loan debts, and certain state income tax obligations. Before a debt is referred to TOP, the creditor agency must send the debtor a 60-day notice, providing an opportunity to dispute the debt.

Once a refund is intercepted, the Bureau of the Fiscal Service will deduct an administrative fee before sending the remainder to the creditor agency. You will receive a notice from the Bureau of the Fiscal Service, not the IRS, detailing the offset, the amount taken, and the agency that received the payment.

Navigating Joint Filings and Spousal Debt

When a married couple files a joint tax return, the entire refund is vulnerable to offset for the debts of just one spouse. This can happen even if the other spouse earned all the income and is not legally responsible for the debt. In this situation, the spouse who does not owe the debt is referred to as the “injured spouse” and has recourse available.

To reclaim their portion of the joint refund, the injured spouse must file Form 8379, Injured Spouse Allocation. This form can be submitted with the original joint tax return, with an amended return (Form 1040-X), or by itself after the offset has occurred. Filing Form 8379 prompts the IRS to calculate the injured spouse’s share of the refund based on their individual income, tax payments, and credits.

Processing time for Form 8379 varies but can take several weeks. It is helpful to attach copies of all Forms W-2 and other documents showing federal income tax withholding to avoid delays. This procedure ensures that the portion of the refund attributable to the injured spouse is protected from being applied to the other spouse’s separate past-due obligations.