Tax Refund Offset – Can The Government Take Your Refund?

Income Tax Refund Offset

Are you looking forward to a big, fat income tax refund when you file your IRS return? Maybe you already have it spent. Imagine your surprise when you get a notice of Tax Refund Offset. Can the government take your refund?

Many people are surprised to learn of a number of debts for which the Treasury Department can offset (reduce) a  tax refund or other federal payments. In many cases, the entire refund can be withheld to satisfy the debt. The debtor is supposed to be notified in advance of the tax refund offset. In many cases the recipient has moved or simply ignores the notice.

Reasons For Tax Refund Offset

What are some of the reasons your federal tax refund can be offset or reduced? Note that your refund is not on the hook only for monies owed to the federal government. The primary obligations include:

• Overdue child support
• Unpaid state income tax obligations
• State unemployment compensation debts involved in fraud
• Delinquent student loan debt
• Other federal agency non-tax related debts

BFS and DMS- Agency That Manages TOP

The Bureau of Fiscal Service (BFS) is part of the Treasury Department. BFS issues IRS tax refunds. BFS is authorized by Congress to manage TOP – the Treasury Offset Program, which it administers through its Debt Management Services (DMS) arm. A lot of initials, right?

Basically, the TOP is an automated, centralized program to intercept federal and state payments to collect delinquent debts owed to federal and state agencies. Federal agencies must notify TOP of all non-tax debts delinquent more than 180 days. Delinquencies over 90 days can be reported.

Agencies involved in obligations such as those above  submit delinquencies to the DMS. Under the TOP provisions, DMS will take as much of your refund as is needed to pay off the debt. It sends the funds to the agency you owe. DMS also notifies IRS of the amount of the tax refund offset deducted from your original refund amount. If there is any portion of your refund remaining after offset, that amount will be issued to you.

How Does TOP Work?

Creditor agencies (e.g.Department of Education) submit delinquent debts to BFS for collection and inclusion in TOP. Payment agencies submit payment vouchers to Bureau of Fiscal Service.

Before a federal payment, such as an income tax refund, is disbursed, BFS checks the database. Officials compare the payment name and TIN (Taxpayer Identification Number) with debtor name and TIN. When they find a match, to the extent allowed by law the disbursing official offsets (withholds) the payment to satisfy the debt submitted by the creditor agency.

The government creditor agency must send you notices about your debt. The creditor agency will provide opportunities to resolve or dispute the debt, and respond to inquiries. If you get a tax refund offset and have not received a notice about your debt, you must call the agency to which you owe the debt.

If a tax refund offset occurs, BFS sends the payee a notice setting forth:

• The original refund amount
• Your offset amount
• The agency receiving the payment
• The address and telephone number of the agency

Tax Refund Offset Disputes And Questions

One of the foremost questions posed by taxpayers is from “injured” spouses.  Must one spouse must forfeit his or her share of the refund on a joint tax return for a debt that is the sole obligation of the other spouse? Generally, no. In such a case, the non-debtor spouse can file IRS Form 8379 (“Injured Spouse Allocation”). The form can be downloaded from IRS website at http://www.irs.gov/pub/irs-pdf/f8379.pdf.

Child Support

Many of these spousal obligations are for child support. Questions can be answered and assistance found through the Office of Child Support Enforcement.

Delinquent Student Loan Debt

Many former students are surprised to receive a tax refund offset for delinquent student loan debt. If you are delinquent on federal student loan debt, check out MyEDDebt.com. This site provides information and assistance to help resolve defaulted loans or grants that have been assigned to the Department’s Default Resolution Group. Student loan debt will not go away until you do something about it, so if your federal student loan education payments are delinquent, don’t ignore it.

Tax Refunds – Not A Good Savings Plan

As a completely separate matter, tax refunds are not a good savings plan. Do you count on a big income tax refund each year to take a vacation, buy something special, or just to pay your bills? You might consider readjusting your payroll withholding. Set up a bank savings account to keep the extra money you get in your paychecks.

This is not to suggest avoiding your child support, student loan payments or any other debt you owe that could be collected through a tax refund offset. But why lose control of your money by using the government as a non-interest bearing savings account?