6 personal debts that can result in a tax refund offset - Michael Smeriglio

6 Ways the IRS Can Seize Your Tax Refund

Article Published by: msn.com

Here are the six major kinds of personal debts that can result in a tax refund offset, along with some advice about what you can do if it ever happens to you.

Federal Income Taxes–

If you owe back income taxes, your refund can be taken to pay them. Whatever is left, if anything, will be refunded to you in the way you requested on your tax return, either by direct deposit or check. You should also get a notice from the IRS explaining why the money was withheld. If you believe that a mistake was made, you will need to take it up with the IRS. The number to call for questions or assistance is (800) 829-1040.

State Income Taxes –

The feds can also withhold money from your tax refund to cover unpaid state income taxes.

State Unemployment Compensation –

If your state believes you collected more in unemployment compensation than you were entitled to, either due to outright fraud or to a failure to properly report your earnings, it can also ask the U.S. Treasury to offset your tax refund.

Student Loans –

If you defaulted on a federally insured student loan, the government can seize your tax refund to help repay it. The Treasury Department is required to send you advance notice as well as to provide an opportunity for you to challenge the claim or pay it off before your refund is withheld. Your state could also withhold money from your state tax refund for this purpose. In addition, the U.S. Department of Education, or the guaranty agency that holds your loan, has the authority to order your employer to withhold up to 15% of your disposable income until the defaulted loan is paid off. You can learn more about dealing with defaulted student debt here.

Child Support –

When parents become delinquent in paying court-ordered child support, their state’s child-support agency can request that the Treasury Department withhold money from their tax refund to cover the back payments. People in this situation should receive a pre-offset notice explaining how much they owe, how the tax refund offset process works, and how to contest the debt. Once the money has been withheld from their refund, they should also receive a tax refund offset notice from the Bureau of the Fiscal Service showing how much money it withheld and referring them back to the state child-support agency if they have further questions.

Spousal Support –

Similarly, an award for spousal support that’s part of a child-support order can also result in a tax refund offset if those payments are overdue. Note that if you filed a joint tax return with your spouse, and your refund was offset because of debts belonging only to your spouse, you can request your portion of the refund back from the IRS. The claim form goes by the somewhat confusing name of Injured Spouse Allocation (IRS Form 8379) and can be found online.

Bear in mind, too, that your tax refund isn’t the only leverage the Treasury can use to collect on back debts such as the ones listed above. Your supplemental security income cannot be garnished, even by the government.

The Bottom Line

If you have certain kinds of unpaid debts – such as federal or state taxes, child or spousal support, a student loan that’s in default, or unemployment compensation to which you were not entitled – the U.S. Treasury can hold back all or part of your income tax refund to help pay them off. The practice is known as a tax refund offset, and it certainly leads to upset, so try not to let it happen to you. (For more, see Start Over with the IRS.)


Mike Smeriglio III is a financial specialist. A licensed CPA since 1985, Mike has been providing tax preparation services to individuals and businesses for more than 30 years through his firm located in Greenwich, CT.