By If your tax return shows a refund, you probably expect the IRS will pay that total amount when it processes your tax return. Unfortunately, this is not always the case.
The Treasury Department can and does deduct from your tax refund certain debts owed to various government agencies. Such a deduction is called a “tax refund offset.”
The Department of the Treasury Bureau of the Fiscal Service (BFS) processes tax refunds and runs the federal Treasury Offset Program. BFS is not part of the IRS.
If you owe any of the following types of debts, the creditor agency can notify BFS to add your debt to its database of delinquent debts:
- Child support
- Spousal support
- State income tax
- Federally insured student loans
- Debts owed to federal agencies such as the Small Business Administration
- Unemployment compensation debts
The IRS can deduct unpaid federal income taxes from refunds, but this is not part of the Treasury Offset Program.
A refund offset shouldn’t be a surprise, because you must be given notice before it occurs. The agency involved must send you a notice of intent to offset the debt at the name and address on file, at least 60 days before referring the debt to BFS (65 days for school loans).
Once you receive such a notice, you must act quickly to avoid the refund offset. You can prevent a refund offset by paying what you owe or entering into a payment plan with the creditor agency. You can request a review by the agency if you believe you don’t owe the debt or the amount owed is incorrect (you must submit evidence proving this).
Contact the agency that imposed the offset, not the IRS or BFS. Neither the IRS nor BFS has the authority or the necessary information to help you. Contact the IRS only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.
If you filed a joint tax return and the debt was owed by your spouse, not you, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. The IRS will compute your share of the tax refund and pay it to you.
The easiest way to avoid an offset is to have no tax refund (or a small refund). To avoid a refund while also avoiding penalties for underpaying your taxes, you must be sure that your withholding and/or estimated tax payments match the amount of tax you owe for the year. This isn’t always possible, but it should be your goal.
In any event, large refunds are not good tax planning—they are an interest-free loan to the IRS.
If you want to discuss your tax refund, please call me on my direct line at 408-778-9651.