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What Debts Can Trigger a Tax Refund Offset?

The IRS issued over 247 million tax refunds in 2021, not counting about 313 million additional refunds issued as part of the 2021 stimulus package for COVID relief. Most taxpayers receive a tax refund because they slightly overestimate their tax liability when making estimated quarterly payments or income withholding; an attractive alternative to the IRS slapping you with a potential bill for late due taxes after Tax Day has come and gone.

Whether it’s a few hundred dollars or even more, the annual tax refund is a cash check most Americans can’t wait to claim. It can pay for a month or two of groceries, cover the utilities or rent, or even go towards a lovely weekend. Furthermore, slightly overpaying gives taxpayers something to look forward to at the end of tax season rather than being a source of just dread or frustration. But what happens when the government claims that tax refund for itself? It’s more likely than you would think.


What Is a Tax Offset?

The federal government has several ways of acquiring owed money from taxpayers, one of which is their ability to use your tax refund under certain circumstances. Those circumstances are certain unpaid debts. While not all trigger a tax offset, certain debts will cause the IRS to effectively spend your tax refund before you ever get your hands on it. The Treasury Offset Program, or TOP, initiates tax offsets.

The US Department of the Treasury runs the TOP program, the same department responsible for issuing those 200+ million tax refunds annually. The US Department of the Treasury does not personally go through the financial details of hundreds of millions of taxpayers that it issues refunds to find an unpaid debt.

Instead, applicable creditors inside the government can notify the Treasury of your debt if you have gone more than three months (90 days) without making a payment or issuing any communication. Usually, these government agencies will inform you of your failure to pay and give a warning before asking the Treasury to take action. At this point, if you fail to address your debt, the Treasury may manage your refund for you, in whole or so far as your refund covers it.


Triggers for a Tax Refund Offset

There are several different debts that the IRS can use your tax refund to cover. The first and most obvious is tax debt. If the IRS discovers that you owe X because of a mistake on your return, your tax return can cover that amount before it is issued to you. Past-due federal tax debt is the only debt the IRS can pull out of your tax refund itself.

The US Treasury handles all other tax offsets. It isn’t just tax debt for which the government might use your tax refund. Any debt owed to the government or unpaid loans meant to serve the public may be subject to the Treasury Offset Program. This means:

  • Government student loans.
  • State and federal tax debts.
  • Delinquent child support.
  • Unemployment compensation debts.
  • Unpaid spousal support/alimony.


How the IRS Notifies You

Once the Treasury receives a notice from another agency that your owed debt has gone unpaid for a few months, they will issue a Notice of Intent to Offset. This notice warns you that they will use your tax refund to cover an unpaid debt rather than return it to you. In addition to specifying which agency and what debt they will send your tax refund to cover, it will also let you know if the IRS will leave you with any tax refunds after you pay the debt.

If it is a minor amount, your refund may cover it, and you still may have a remainder to be sent back. Otherwise, the IRS will use your tax refund to cover all or a portion of your debt. If you’ve received a notice of intent to offset, you still have the option to resume payments or take the matter up directly with the agency in charge. That is not the IRS, and it is not the US Treasury.

Suppose you owe federal student loans, for example. In that case, you may be able to salvage your tax refund if you try and seek student debt relief to reduce or eliminate the remainder of your debt or seek relief through the Federal Student Aid Ombudsman Group. Once you receive your notice, you have sixty days before the Treasury initiates the tax offset and claims your refund.


What If It Wasn’t Your Debt?

What if the IRS made a mistake? Or they got the wrong person? Or, what if the IRS claimed your tax refund due to a joint tax return? Is your portion of the tax refund doomed to disappear into their student loan debt, too? Taxpayers have specific recourse methods to seek an appeal and stop a tax offset if the IRS performs one erroneously.

For example, if the IRS claims your refund for your spouse’s debt – and if you played no role in their debt – you could file IRS Form 8379 to clear up the situation and salvage your portion of the refund. Alternatively, you will want to contact the respective state or federal agency in charge of the debt you are being charged with, to resolve the matter and prove that the IRS made a mistake before the Treasury uses your tax refund.


Preventing a Tax Refund Offset

If you have federal debts – such as student loan repayments, alimony payments, or child support – making sure you don’t fall behind is an excellent way to preserve your tax refund. If the IRS notifies you of a tax refund offset despite being on time with your federal or state debts – or if you have no obligations, contact a legal professional immediately and seek help.

Suppose you have fallen behind on payments and still want to salvage your tax refund for a different purpose (such as a credit card debt). In that case, you might be able to delay or avoid a tax offset by negotiating a payment plan with the respective agency in charge of your debt or seeking debt forgiveness.


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