Will the IRS Take My Tax Return If I Owe Money?

Taxpayers often anticipate a refund when filing their annual income tax returns, which represents an overpayment of their tax liability throughout the year. The Internal Revenue Service (IRS) administers the federal tax system, processing returns and issuing these refunds. While a refund can be a welcome financial boost, there are circumstances where the IRS may adjust or retain a portion or all of it.

When Your Refund Can Be Offset

A refund offset occurs when a taxpayer’s federal tax refund is reduced or withheld to satisfy a past-due debt owed to the government or certain other entities. This mechanism allows federal agencies to collect debts by intercepting federal payments, including tax refunds. The primary condition for an offset is an outstanding, legally enforceable debt that has been certified for collection.

The Bureau of the Fiscal Service (BFS), part of the U.S. Department of the Treasury, manages this centralized offset program, the Treasury Offset Program (TOP). Federal tax debts generally take precedence over non-tax debts when an offset occurs. Non-tax debts are typically handled in the order they are received by the Treasury Offset Program.

Debts That Trigger a Refund Offset

Several specific categories of past-due debts can lead to a federal tax refund offset. These debts are certified to the Treasury Offset Program for collection.

Past-due federal tax debts are a common reason for an offset, including unpaid income tax, penalties, and interest from previous years. For example, if a taxpayer underpaid their estimated taxes in a prior year, the resulting balance due could be offset from a current year’s refund. These debts are certified by the IRS.

Past-due child support payments are another significant category. The amount of child support owed must meet specific criteria regarding age and amount for offset eligibility. Past-due state income tax obligations can also result in a federal refund offset through agreements between the state and the Treasury.

Other past-due federal non-tax debts encompass a broad range of obligations owed to various federal agencies. Examples include defaulted federal student loans, overpayments of federal unemployment compensation, or debts owed to federal agencies like the Small Business Administration.

The Refund Offset Process

Once a taxpayer’s refund is identified and a qualifying past-due debt exists, the Bureau of the Fiscal Service (BFS) initiates the offset process. BFS compares federal payment requests against a database of delinquent debts. If a match is found, the refund amount is intercepted, either partially or in full, to satisfy the debt.

Taxpayers are notified by mail if their refund has been offset. The BFS sends a notice explaining the offset. This notice includes the original refund amount, the amount withheld, the agency receiving the funds, and contact information for that agency.

The BFS notice arrives within a few weeks after the tax refund would have been issued. The offset occurs before the remaining refund is sent to the taxpayer. The IRS generally does not send notifications for non-tax debt offsets, as the offset is performed by BFS.

Addressing an Incorrect Offset

If a taxpayer believes their refund was offset in error or disputes the underlying debt, steps are necessary to address the situation. The IRS cannot resolve disputes regarding the validity or amount of non-tax debts, such as child support or federal student loans. For these issues, the taxpayer must contact the agency to whom the debt is owed, using contact information on the offset notice.

When contacting the agency, taxpayers should have the offset notice, their Social Security number, and any documentation related to the debt available. If the debt was already paid or is incorrect, provide proof of payment or clear evidence of an error. The TOP call center can also provide information on whom to contact.

The IRS can assist if the offset was applied due to an incorrect Social Security number or if the federal tax debt was already paid to the IRS. For joint returns where only one spouse owes a debt, the non-debtor spouse is eligible for “injured spouse” relief. Filing Form 8379, Injured Spouse Allocation, allows the non-debtor spouse to claim their share. This form can be filed with the tax return or separately after receiving notification of an offset.